Ok, so we all know the Fed is more “S&P dependent” than they are “data dependent,” right? Don’t forget this from Wells Fargo:
The Fed rarely tightens unless the market is pricing at least a 60% of a rate hike one month before the FOMC meeting. Figure 7 underscores this point. The Fed has implemented 25 bps hikes on 27 occasions since 1991. Twenty days before the hike, the implied probability was below the key 60% level in only three of the 27 cases. The Fed tightening in December 2016 fit the historical pattern. The rate hike was very well advertised by the Fed, and the implied probability was about 80% a month before the FOMC meeting.
As I wrote last week, it’s not often that we get to say “wow, that Wells Fargo note is looking pretty prescient right about now,” but given that the excerpted passage and chart shown above came out in early February, this is one of those rare times.
But when it comes to the Fed anno 2017, one of the interesting dynamics to observe is the interplay between a committee that wants to normalize and a new administration that wants a weak dollar.
Obviously, a FF hike only serves to exacerbate the extent to which rate differentials are dollar supportive and so by definition, a hike is anathema to Trump and Navarro. Oh the f*cking irony, right? This would be the very same Donald Trump who just last year accused Yellen of keeping rates to low and doing “political things.”
Below, find the latest from former FX trader Richard Breslow who notes that the committee must now bow to “Caesar.”
Via Bloomberg’s Richard Breslow
Do you know why the Fed has decided to raise rates next week? It’s not because things have started to go well. It’s because nothing new has gone bad. What they fear like the dickens is to have to stand down, let alone backtrack. Better to leave it to the last moment and if the coast looks clear, make their move. Data dependence in an environment where the numbers have certainly been good enough has morphed into a vigil for when the next shoe will drop. This is the new form of optionality.
- Talk is cheap. When they suggest three rate hikes or upgrade their dots, they are really promising little. They don’t know what the world will look like come June, let alone December. It will be one rate hike at a time, events permitting. Which also means data, while important, is a body of evidence whose meaning will only be revealed at the last moment
- Don’t expect that we’re in a tightening cycle that will ever resemble those of yore. Global economic and geopolitical risks make that a simplicity of fond memory. The financial crisis-hangover means we are forced to take it the proverbial one day at a time
- The institutional threats they face make the thought of any misstep horrifying. With all of the sniping from other parts of Washington and the looming new appointments, they understand the need to be the perfect Caesar’s wife. A lot to ask as they disengage the policy auto-pilot of the last eight years
- By moving the rate hike forward, they did indeed increase the chances of more this year than previously priced. That’s true simply by definition. But their hawkish lurch changed pricing far less than anyone would have expected. Unless you were prescient enough to be playing the April futures contract
- Friday’s post-Yellen price action was less buy the rumor, sell the fact, than a reevaluation of just how much things may not have changed to the as yet believable trajectory of things. Something to at least consider as you evaluate just where you think the dollar or 10-year might be going in the near future
- Will Friday’s non-farm payrolls matter? Yes, only not for March. But how we begin talking about June. It won’t be an economic release potentially derailing the hike, just another of those infernal unknowns