Prepare for Liftoff

The Federal Reserve's missive to banks (Advisory on Interest Rate Risk Management, PDF, hat tip: Tyler Durden) is a tad ominous:

The financial regulators are issuing this advisory to remind institutions of supervisory expectations regarding sound practices for managing interest rate risk (IRR). In the current environment of historically low short-term interest rates, it is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases in interest rates.

Regulators warn that interest rate changes could be sudden and violent.

Lower rates helped lead to record quarterly profits at large banks such as Goldman Sachs Group Inc. and Wells Fargo & Co.

“This is a reminder that that source of profits isn’t permanently locked in,” said Vincent Reinhart, a former Fed monetary-affairs director who is now a resident scholar at the American Enterprise Institute in Washington. “Large changes in rates are possible, and it isn’t just what the Fed does, it’s how markets react to what the Fed starts doing.”

The regulators told banks to run stress tests with scenarios including “instantaneous and significant changes” in rates and “substantial changes in rates over time,” including shifts of as much as 4 percentage points.

Coincidentally, the 4 percent hike theme echoes this week's statement by the Federal Reserve Bank of Kansas City's President Thomas M. Hoenig:

The Federal Reserve must curtail its emergency credit and financial market support programs, raise the federal funds rate target from zero back to a more normal level, probably between 3.5 and 4.5 percent, and restore its balance sheet to pre-crisis size and configuration...

...Maintaining excessively low interest rates for a lengthy period runs the risk of creating new kinds of asset misallocations, more volatile and higher long-run inflation, and more unemployment -- not today, perhaps, but in the medium and longer run.

The era of hundred billion-dollar wealth transfers -- stealing from taxpayers to hand to Wall Street's crony capitalists -- is rapidly drawing to a close. And with it, the pump priming the equity markets is poised to run dry.