Another exercise in FOMC verbal gymnastics
When it comes to the FOMC initial uptake, appearances can be deceiving if not flat out confusing as traders are tasked to respond quickly to what is often little more a series of FOMC verbal gymnastics implied in the accompanying statement only to have to have some clarity delivered at the press conference. Even more so this morning when the Fed removed the term ‘accommodative’ from their FOMC statement.
Fact:
The Feds Leal Brainard and Charles Evans explicitly talked about hiking beyond neutral last week, so the removal of the term ‘accommodative’ should have been clear as a bell as the FOMC doves were detouring in a hawkish direction over their rate outlook. Dropping the word ‘accommodative’ should not have had any material impact on the future path of US monetary policy. It’s clear as day a majority of the Committee think that it will be appropriate to continue raising the federal funds rate as graphically illustrated in the dots that spell out the Fed rate hike intentions over the next few years.
View:
Indeed, a bearish dollar overreaction to the initial uptake on the statement, but Chair Powell in his introductory statement to the press conference, he clarified what dropping accommodative means, and succinctly, these two @terminal headlines spell it out nicely
*POWELL: DROPPING ACCOMMODATIVE DOESN’T SIGNAL RATE-PATH CHANGE
*POWELL: OVERALL FINANCIAL CONDITIONS REMAIN ACCOMMODATIVE
In a beautiful example of FED verbal gymnastics:
‘It wasn’t because the policy is not accommodative. It is still accommodative.’
Fact:
But this clarification was not convincing enough to support US bond yields, especially after Chair Powell told reporters during his post-FOMC new conference ‘The main thing where we might need to move along a little bit quicker if inflation surprises to the upside. We don’t see that’ So while the US economy is firing on all cylinders, in the absence of inflation its the FOMC are unlikely to nudge future rate hike forecasts higher, a position the Feds have held since forever.
View:
But, the fall in US bond yields should not be interpreted as a dovish lean from the FOMC but rather that the Bond markets see future Fed hikes are more reasonably priced into the equation while taking back short bond positions that we’re hedges against possible hawkish tail risk. Which has triggered flattening across the curve providing a headwind USDJPY which has moved down to test near-term support while the DXY Index is partially unchanged suggesting the FOMC was, as we anticipated, a non-event for g-10 currency markets.
However high beta currencies continue to trade favourably, and with the Feds holding the dot plot curve steady as she goes, the lack of hawkish follow through should be comforting to Asia EM currencies.
Summation:
Far too much ink was spilt on this event as ultimately what counts for currency markets is US economic growth, data and lots of it, such as next weeks payrolls number and the significant wage growth component. The FOMC is entirely data dependant, and a definite uptick in inflation will ultimately change the Feds view.
