Incoming! More “Fed pause” analysis.
The cacophony around what exactly it is the Fed is or isn’t trying to communicate to markets is now flat-out deafening. Naturally, that has precipitated increasingly belabored attempts to divine something that might not even be there in every single soundbite from Fed officials.
“Unfortunately, we appear to be morphing into that point of the cycle where you need an advanced degree in semiotics and textual analysis to ‘understand’ what the central bank is saying, at least judging by the tortured interpretations of some recent Fed communications”, Bloomberg’s Cameron Crise lamented on Wednesday morning, ahead of Jerome Powell’s remarks which have been hyped up more than LeBron’s Lakers debut.
Donald Trump is obviously contributing to (and exacerbating) this dynamic with his incessant criticism of Powell, criticism which he ratcheted up even further on Tuesday evening in a series of absurd comments to the Washington Post.
For their part, Goldman thinks the price action across assets does not support the contention that the market believes what front-end rates markets are saying about a dovish Fed shift.
“Since early November, market pricing for the federal funds rate in 2019 has declined by about 20bp, and now implies that the committee will deliver only 1.4 rate increases next year [and] many market participants ascribe the repricing to a more dovish message on the outlook for monetary policy'”, Goldman writes, in a note out Wednesday morning, before noting that “a perceived shift from the central bank usually leaves fingerprints on other asset markets, and almost none of them are apparent this time around.”
Long story short, Goldman notes that if the Fed’s reaction function had in fact changed, you’d be seeing “lower real rates, a weaker exchange rate, and pro-cyclical changes in an economy’s risk asset markets.” This time, we’ve seen the opposite of that.
Rather than tipping a dovish Fed lean, Goldman says the stronger dollar, weaker gold prices, trouble in cyclicals and rising volatility across everything but rates, are all “shifts that would normally be associated with a more hawkish central bank, and look inconsistent with the idea that markets have discounted a more dovish FOMC reaction function.”
The bank’s takeaway is that what you’ve seen in nominal rates is a reflection of a less rosy outlook for growth and inflation, not the market pricing in a dovish Fed.
What are the implications? Well, for one thing, the bank doesn’t think the dollar rally is sustainable, a contention that happily “dove”tails (get it?) with their weak dollar call for 2019. Additionally, the bank says risk assets have probably bottomed because thanks to subdued inflation, the Fed won’t be blindly hiking in a frantic effort to stay out ahead of surging wages and price pressures. “Excessively tight financial conditions will (at some point) result in a Fed pause”, Goldman says. The question is “when?” because Goldman is in the camp that expects four hikes in 2019.
Are you confused yet? If so, just ask Donald Trump to help you sort through the noise because after all, his “gut” is always right when it comes to monetary policy.