Tag Archives: Fed Meeting

Fed pulls off 40-word Houdini

The Fed kept rates on hold yesterday – pretty much a done deal – and its statement yesterday following its two-day policy meeting was very short on new insights.

But it was in line with my expectation that while the Fed would present a marginally less dovish assessment of the global economy, it would paint a still cloudy picture of the US and nurse the recently faltering rally in global risk appetite. US equities closed up 0.3% yesterday and 2, 5 and 10yr US treasury yields are down 6-10bps since Tuesday.

The Fed faces seven rocky weeks ahead of its 15th June meeting. It will likely want to keep the door ajar for a hike and will therefore not want to see US yields break out of range. But the market’s violent reaction today to the BoJ’s unchanged monetary policy is also a stark reminder that an overly-hawkish Fed could derail global risk appetite and in turn delay any Fed hikes.

With this in mind, my core scenario of a June hike is likely to be tested in coming weeks and the risk remains that flat-lining emerging market currencies will come under pressure. Read more

It’s a Fed hiking cycle Jim, but not as we know it

Tomorrow’s Fed policy meeting decision is unlikely to throw up any surprises, with the market having priced out any chance of a hike. The real focus will be on the language of the accompanying statement.

The market has arguably already priced in the possibility of a slightly less dovish Fed, with US yields at a one-month high. The US labour market remains robust, inflation expectations have ratcheted up, as have house prices. Chinese economic activity has picked up and global equities and commodity prices have surged in the past couple of months.

But the Fed is also likely to reiterate its concerns about slowing global growth, US business investments and exports and the headwind to US growth from the manufacturing sector. This nuanced picture is summarised in the heat-maps in Figures 5 & 6.

Moreover, the Fed has made clear it would look beyond potentially temporary developments and could well play down the recent rebound in global energy prices and in major economies such as China.

I therefore expect the Fed to be constructive enough tomorrow to keep US yields in reasonably narrow ranges but to stop short of encouraging a significant repricing for a June hike.

This remains a challenging balancing act for the Fed as equity markets and non-commodity currencies have been flat-lining recently. If the Fed intensifies its dovish warnings, markets could start looking more closely at what is keeping the Fed from delivering only its second hike in a decade. Conversely, a more hawkish stance could spook a market attuned to dovish Fed rhetoric.

My core scenario remains for the Fed to hike rates once or twice this year, which would be sufficient to expose the soft under-belly of EM currencies. Read more