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Good morning. To analyse Fed communications is to enter a wilderness of mirrors (to borrow James Angleton’s unforgettable phrase). What the US central bank says matters in large part because everyone believes that everyone else believes Fed policy is very important. The whole psychological construct threatens to disappear up its own backside at any moment. Still, we try to sort out the latest development below. Email us: [email protected] and [email protected].
The Fed is not hawkish. What if that changes?
Last week’s Fed meeting sent bond yields up and stocks down. The near-universal reaction was that Fed chair Jay Powell’s press conference was more hawkish than expected, confirming the central bank was behind the inflation curve and means to get ahead of it. The market now thinks four to five rate increases are coming this year.
Financial conditions were tightening even before the meeting, as this chart shows (axes are arranged so that down means tighter and up means looser):
Unhedged was a little sceptical, though:
We think the market is reading tea leaves that haven’t been brewed yet. In his briefing, Powell emphasised again and again that the Fed would be “nimble”, adapting policy to fit the economy
We have received a small measure of vindication. It seems Fed officials are trying to coax markets out of their alarm. Here’s Bloomberg yesterday:
There are signs that some Federal Reserve policymakers think that markets may be getting ahead of themselves with the projected pace of rate hikes. Four officials spoke [on Monday], each emphasising the need for gradual tightening and the need for moves to be data-dependent. Kansas City Fed president Esther George, a policy voter this year, said “unexpected adjustments” are in nobody’s interest while San Francisco Fed chief Mary Daly emphasised the need not to be disruptive.
The message, while multi-vocal, is not perfectly harmonious. James Bullard, president of the St Louis branch, said yesterday that he was in favour of increases at the next three meetings (March, May and June) and that five rises were “not too bad a bet”. But he batted away the notion of a 50 basis point March rise and echoed Powell’s mantra of data dependence. The overall message — that Mr Market needs to relax — is pretty clear.
The Fed refused to say what its new plan was, because it does not yet have one. The market’s collective imagination ran wild with the hawkish possibilities this left open. That forced the Fed to say, guys, really, we’re waiting for more data. The whole episode shows how carefully the Fed must calibrate its communications — and how extreme the market reaction might be if the Fed actually did communicate the…
Read More: The Fed says nothing, and the market won’t listen