FOMC Musings

March 16th, 2016 8:11 am | by John Jansen |

Via Chris Low at FTN Financial:

What we’re hearing:

·        From traders: In conversations with customers this week, we heard a lot of skepticism about the Fed raising rates at all this year. Many sophisticated traders think the FOMC is making the same mistake the BOE did in 2014: Sure, they say they’re going to raise rates, but how can they?

·        From the Fed in January: “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2% inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”

·        Also in the January minutes: “The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.”

What we expect this afternoon:

·        No rate hike, but it will be closer call than people think. After all, markets always sell off after the Fed starts raising rates, and to the extent there was air in asset prices, it’s not even necessarily a bad thing. Greenspan in 1994, for instance, was pleased stocks sold off. Now that markets have found a bottom, FOMC voters will be far less concerned.

·        The new language added to the January statement, about “closely monitoring global economic and financial developments” may remain, but watch for Yellen in her press conference to point out that i.) Foreign central banks have taken considerable steps to address economic weakness and ii.) Calm has returned to markets.

·        The Fed may revive October’s tell: “In determining whether it will be appropriate to raise the target range at its next meeting…” If so, watch for market odds of an April hike to spike. Fed officials have wanted the market to give equal weight to the chance of rate hikes at non-press conference meetings since they first seriously discussed raising rates. They may see this as a silver-lining to being forced to hold off raising rates in March.

·        We expect the Fed will abandon one of the four hikes from December’s median 2016 dots, but only one. The forecast used to justify tightening was too deep seated to fall apart all at once. Besides, inflation is rising.

There are many, many variables in play today. Consider the extremes:

·        On one end of the range of possibilities, the Fed could capitulate  to pressure from Christine Lagarde and other internationalists, admit there is a global deflation threat held at bay only through the concerted joint efforts of central banks and abandon plans to raise rates this year.

·        On the other end of the range, the Fed could cite the January rise in core inflation as proof their forecast is on track, raise the Fed funds rate and keep the additional 300bp median dot plot forecast for fed funds by the end of 2018.

·        Recent Fed rhetoric suggests the committee’s sentiment is closer to the second bullet than the first, though committee members have given up on tightening in March out of fear the financial markets would not have settled down if they had not backed off.

Before the Fed, another healthy dose of economic data:

·        Feb CPI -0.2% mo/mo and 0.9% yr/yr

·        Feb core CPI 0.2% mo/mo and 2.2% yr/yr

·        Feb house starts 4.6% to 1150k

·        Feb building permits -0.2% to 1200k

·        Feb industrial production -0.3%

·        Feb manufacturing production 0.1%

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