In challenges involving tortoises and hares, slow-and-steady is apparently the optimal strategy. However, in the monetary policy race of life, the slow-and-steady pace of rate-hikes is increasingly throwing shade and casting doubt on The Fed’s self-confidence of its own forecasts for growth and employment.
As we stand, Fed Funds futures imply a very modest chance of a rate-hike in 2020, and OIS imply an actual rate-cut in 2020 – both well below the expectations of a notable hike implied by The Fed’s dots…
Former fund manager and FX trader Richard Breslow feels the same, inferring that Jay Powell should hike faster or higher… or get off the economically exuberant narrative pot.
Via Bloomberg,
The FOMC is going to raise rates this afternoon. I assume that doesn’t come as a shock to anyone.
It’s a shame that it won’t. Because my preview of the meeting is not about what they will likely do, but is a rush to the postscript that whatever it will be just isn’t enough.
Other than accepting the misguided notion that they must gently hold our hands and guide us forward with an utter lack of upset, it’s hard to conclude policy makers are actually doing the job at hand.
Look at the numbers. Listen to their words. Accept that they have the added motive of wanting greater daylight between current rates and zero. There is absolutely no reason any longer for this laboring 25 basis point timidity. Other than their seeming lack of faith in their very own forecasts. Which is ironic, because the greatest speculation going in, and undoubtedly what will be most discussed afterward, are the dot plot guesses. Made all the more distracting by the addition of 2021 to the forecast horizon
Fed speakers across the spectrum have been pushing back on the notion that the neutral rate is as low as has been assumed for a number of years.
They claim, perhaps dubiously, that they are not unnerved by the flattened yield curve. We’ve even been treated to speculation that a period of restrictive rates may make sense.
And yet, there is real debate whether the word “accommodative” will stay in the statement or not. If it is gone, assume the market will believe they have far less commitment to their words than we are meant to think.
Equity markets are strong as bulls. Even if naysayers find idiosyncratic patches to complain about. Bond yields are higher, but it’s fair to argue that the 10-year Treasury yield languishing below May’s highs is causing no one any pain. The dollar is under pressure.
I keep reading that the rate hike is so completely priced in, that as soon as they hike, the currency will be sold. I’m not sure why the wait, if that’s your view, but the notion is definitely out there. No apparent imminent threat of a runaway Bloomberg dollar index. In fact, bullish calls on emerging markets are becoming pretty common. What market, you have to ask, is in need of mollycoddling?
Are trade and tariffs a potential threat? I think so, but keep getting told the knock-on effects are less than I think. And if anyone tells you the fear is stopping corporations from investing, ask about share buybacks and equity cushions. In any case, whether the Fed does more or as expected today, it will have no effect whatsoever on this situation. In a peculiar way, it might actually stoke animal spirits. And possibly help other central banks get off the dime.
I’m sure this is all asking more than is likely to happen. But just like policy makers wish futures markets would take them at their word, their policy decisions should also match their communications.
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