Should you “trust” (and I don’t even know what that means here because in your capacity as a market participant “you” were involved in creating the reaction) the market’s dovish interpretation of the Fed?
More than a few people have suggested that the answer is “no” – or at least “probably not.” “[The] market reaction to yesterday’s Fed announcement was somewhat bizarre,” Bloomberg’s Cameron Crise wrote on Thursday morning, adding that “after all, there was nothing in the guidance (and little in the press conference) to justify a rally in short rates.”
Right. And that seemed immediately obvious. Some of yesterday’s move was attributable to the lackluster core CPI print we got earlier in the day, but the rally accelerated “bigly” during the presser. It’s reversed since and given the above, that seems rationale.
Well for their part, Goldman agrees that markets got this one wrong. To wit, from their Fed follow-up:
The fixed income market rallied following the release of the FOMC statement and during Chair Yellen’s press conference, and many market participants seem to have taken the December meeting as a dovish surprise.
Many viewed the combination of a sizeable upgrade to the growth numbers and no upward movement in the 2018 and 2019 dots as an indication that the FOMC has now mostly accounted for the impact of the tax cuts, but did not feel that their impact warranted additional tightening, at least over the next two years.
Long story short, Goldman thinks that’s a mistake. In their mind, the Fed is fudging the numbers in order to avoid projecting further overheating in the labor market (they don’t put it in those terms, but that’s the gist of it). To wit:
The median projection now shows GDP growth a cumulative 1.2pp above longer-run potential beyond this year and even further above backward-looking estimates of potential, but it has the unemployment rate declining only 0.1pp further through the end of 2020
[…]
The very limited further decline in the unemployment rate likely reflects the FOMC’s sensitivity about showing an even larger overshoot of full employment.
The implication there is that sometime in the future the unemployment projections will have to decline further and the dots will have to shift upward to reflect that.
Beyond that, the bank seems to think that the Fed hasn’t fully incorporated likely changes to fiscal policy in the monetary policy projections yet. That, Goldman says, makes sense because while no one is going to get too bent out of shape if the economic projections have to be revised lower, reversing course on monetary policy would make waves.
“Waiting for greater clarity is sensible because reversing course is a bigger deal with the funds rate projections than with the growth projections [and] in addition, sensitivity to the potential perception that the Fed is offsetting the boost from tax reform might also have led some participants to wait for a future meeting,” the bank concludes.
Not to put too fine a point on it, but all of that makes complete sense to me. Maybe I’m wrong but if I am, that means Goldman is wrong too and we all know that never happens, right?
A whole host of players thinks we invert and “Fed funds generally don’t matter” compared to market rates. Maybe that is so in a QE world.
Rumor has it that half the population (including the “market”) is below average intelligence. Unexpected decisions by the general public/markets increase as a result of the digital age opening the playing field to pretty much everyone with an online device, trading and a social media account. Basically the uninformed have never been so powerful to influence the “wisdom of the crowd.”
How can the Fed reactively change monetary policy when there is no final fiscal policy in place? In other words, there’s nothing there there in either the Fed comments or the Goldman comments on the Fed comments. I think the Fed is stalling until the tax reform bill gets passed (oh and Yellen can exit out the back door).
Yes, Yellen has her hand on the cord as she runs away from this mess. Hey, fed what if? inflation does pop to 4%-5% what’s the plan????????????? Well…. ah…..ah…. I ..don…t……have ….a…….fu*king……..ah..clue.
If so then USD collapses, much more than it did in 2017. Not a prediction but a possibility. With all the unfilled positions at the Fed, nobody knows what it’ll look like. But we do know that Draghi’s days are numbered and the PBOC will be tightening subsequent to their party congress last month. Those economies are at a different point in their cycle. But the Fed must keep pace with lessening accommodation abroad or the dollar could suffer more.