FOMC Decision and the main points
- No attention to the downward revision of the economic numbers such as the retail numbers
- The Dot Plots have changed- they are completely useless and they have not helped in the past
- The views of the new members will be more important
- Fed fund rate pricing for another rate hike = 60%
- US Futures Higher Thanks To The Fed
US futures are ready to pick up where they left off thanks to the rising bank stocks which pushed the US indices to another record highs. The euro-dollar pair has started to move back up ahead of Mario Draghi’s speech, the president of the European Central Bank. The Bank of Japan kept its powder dry during their monetary policy and left the monetary unchanged. The dollar’s strength against the yen is still the prominent theme as the Fed starts their process of scaling down the mammoth balance sheet.
FOMC Decision and the main points
- No attention to the downward revision of the economic numbers such as the retail numbers
- The Dot Plots have changed- they are completely useless and they have not helped in the past
- The views of the new members will be more important
- Fed fund rate pricing for another rate hike = 60%
- The Hurricane situation is not appropriately priced in because they have increased the GDP growth forecast but underestimated the impact on the economic data in the dark period
- Inflation is still considered as transitory > if you leave things for that long, anything could be transitory; But then they said it is a concern
- Fed still seek stronger labour market.
- Reducing the size of the balance sheet is more critical > once the size is down, they can load that up again in case of mistakes but at current levels it is becoming difficult
- The relation between the Fed tightening their monetary policy and the financial conditions would be important and deteriorating conditions may push them to adopt a more gradual approach
Do not be fooled by the dovish (white) colour of Janet Yellen’s jacket. Her statement was perceived as hawkish. Although, it is important to emphasize that there was nothing new which was not expected by the market. The Fed left the interest rate unchanged and maintained their stance towards reducing the size of the balance sheet. Before the event, the Fed fund rate was reflecting that the chances of another interest rate hike in December are credible. The reason that we think that the statement is hawkish is because the Fed has paid no attention to the downward revision of the economic data and this tells us that despite them saying that they are actually data dependent, in reality they are not.
The number of interest rate hikes for the next three year are reduced from 7 to 6, as we said yesterday. So, the Fed dot plot has changed now, but we think that the market should not pay too much attention to this. Firstly, the dot plot represents the individual fed member’s forecast and it provides very little help in the overall picture. Finally, some of the members will no longer be serving beyond this year so the new dot plot is only good for this year.
The dollar index has moved higher as markets have reacted to the decision that the Fed still thinks that more interest rate hikes are possible despite the fact that the size of the balance sheet will also be reduced. The Fed is in dire need to reduce the size of their balance sheet because of its mammoth size, and by reducing the size of their balance sheet to some extent, it gives them a chance to load it up again when they need it. However, something which should not be ignored is the relation between the Fed monetary policy and the financial conditions, the economy would start to see the impact to some extent of this and this makes us believe that the current projections are slightly overrated. The Fed may have to adopt an even more gradual approach over the next three years in comparison to what they are projecting.
Another reason which provided more aid to the dollar bulls was that the statement largely ignored the downward revision of the economic data, such as the retail number for the last two months which were revised down largely. The housing data is giving a message that the lower affordability ratio is also leaving its prints on the headline number. The Fed paid more attention to the equation part which would boost the GDP growth due to the hurricane situation but overlooked the threats of the weaker sentiment which could derail the investor confidence due to the upcoming soft data. The precious metal has moved lower after the FOMC statement because the market has perceived the statement as somewhat hawkish.
