Under the Dodd-Frank legislation the Fed. is required to give “guidance” to the banks under certain stress situations. I happened to read about this in one of Maulding’s articles. It is publically available at;    http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20160128a2.pdf

This is quite an elaborate document so I will spare you the pain of reading it in its totality and get right to the point. Just like the Fed. transmits vibes to the public in general about what it might do with interest rates, it also does this in great detail with regard to a number of variables under certain stress situations, including the level of the DJIA. The idea behind this is that the banks would somehow be better prepared. Here is an example from the Feb. 2016 report;

Granted that this is what might be expected under truly severe circumstances, it is still a little unnerving that even the Fed. can see a situation develop in which the DJIA drops to 10395 (on a total stock market basis). As the high was around 21707 that implies a drop of 52%. On the positive side it would apparently only take 7 quarters to recoup the loss.

Negative short-term interest rates are included in this most severe adverse scenario. Are we almost there?

Waiting for word. Will it be “a considerable time” , “patience”, “data-based” or something entirely new? The direction is clear, so does it matter?

P.S. Those who do not believe in the Fed, or Keynesian mumbo jumbo for that matter, may want to read some of L. Albert Hahn’s writings, most specifically The Economics of Illusion. Unlike Bernanke or Yellen this fellow had one foot in academia but the other firmly in reality. Furthermore he did not just study this stuff but actually lived through parts of it. Some of his writings are available on the internet. The crux of his argument is that Keynes or the Fed are like a doctor with only one single remedy, say a laxative, that is then liberally prescribed as a cure for everything. The resulting unintended consequences invariable then outweigh the immediate good , if there even is one, of the prescription.

Photo is from the McDermit ranch. Pavlov is asking, “Where  the he.. is the bell??”.

http://www.columbia.edu/~mu2166/Making_Contraction/paper.pdf

No pictures or charts here , just a website that brings you to a research report by a duo of professors at the university of Columbia, Martin Uribe and Stephanie Schmitt-Grohé . The paper is above my pay-scale because of the overdose of math that it contains, but if you abstract from that it is extremely interesting. It is , or will be one of the few peer-reviewed academic papers that argues that the Fed is barking up the wrong tree. The argument presented is essentially that under the presently accepted doctrines of the Taylor rule, the downward rigidity of wages, combined with interest rates close to zero there is a good argument to be made that the missing confidence level is perversely fed by keeping interest rates down. This is, of course, precisely the opposite of what the Keynesian Central Bank policy now purports to do. This fits very well with ideas presented by Prechter who, in his “socioeconomic” approach to markets preaches that mood precedes outcome. Granted it is a little bit like “bloodletting” in the middle ages, but provided the patient responds positively it may actually help.   Enjoy the paper as someday this may become the policy standard.