It’s all about “policy paralysis” (as Citi puts it).
The Fed, having managed to squeeze in a largely symbolic hike in December, now faces a rather unpalatable situation thanks to the stubbornly strong dollar. Hiking rates risks adding fuel to the fire and the more the dollar appreciates, the greater the chances that what to this point might be described as “good” strength (i.e. rising against lower yielding currencies) morphs into “bad” strength (i.e. rising against EM currencies), triggering crises in emerging economies beset with USD debt.
(Chart: Morgan Stanley)
Other factors – including, but certainly not limited to, the repatriation of overseas corporate cash and the FX impact of a more protectionist trade stance – suggest that further dollar strength may be inevitable no matter when the Fed hikes and no matter how many times they pull the trigger. Which explains this:
(Chart: Barclays)
So given the circular nature of the relationship between rate hikes and currency appreciation, it’s no wonder the committee seems a bit noncommittal.
Well, one trader isn’t happy about the ambiguity. Below, find the latest from former FX trader and Bloomberg contributor Richard Breslow who “doesn’t like what he hears” from a gun-shy Fed.
Via Bloomberg’s Richard Breslow:
Well, we’ve had the first batch of this week’s deluge of Fed speakers. And I don’t like what I’m hearing. They all want to project bullishness, upside risks to the number of rate hikes, closeness to goals. But not a single one has been willing to explicitly argue the case for a March hike, let alone lay out the conditions that would make it happen. Isn’t that rather curious given the upbeat text of their speeches?
- It’s as if the trauma of pulling the trigger on the 100% priced in December hike has left them enervated despite the brave faces. They will never achieve their annual year-ahead dot plot pronouncements if they don’t change their mindset. The balance of evidence needs to shift to “why shouldn’t we hike” from “why must we hike”. Certainly investors are aware of the current reaction function and fade them accordingly
- And if they are this timid about the first half of the year, it’s not credible to entertain suggestions, a la President Rosengren, that the central bank’s balance sheet might “start moving down”. Of course, nuance being what it is, he actually said “appropriate to examine” the possibility. See that gets the idea out there without actually proposing anything. But it sounds good
- Incidentally, his assertion that such a reduction will only have a modest impact on real interest rates is highly optimistic and unlikely to be accurate. The optics are bad, but the Fed probably takes great comfort in their bloated balance sheet
- There’s certainly a lot of uncertainty out there. From all sides. One thing we should have learned is that reality isn’t going away. There’s always something. Not a little bit as a result of the asset bubbles they weren’t willing to address 10 years ago. So if something happens, their June or September gets postponed. So what. That should logically be irrelevant for March
- I realize that all meetings are live and they are properly data-dependent. But don’t they owe us a clear indication of what it would take to actually get March, a full three months after the previous hike, to be meaningfully more likely than 33%? That would be forward guidance that was actually useful
********
Summed up visually for those who appreciate a good throw back cartoon reference:
