April 09

FOMC Fights Hawkish Fires

Today’s FOMC minutes provided clarity on the March 19th Fed meeting that left markets with a hawkish impression on monetary policy. The original statement and forecasts of the fed funds rate initially sent the US dollar and short term interest rates higher. Markets expectations of easing have been adjusted lower substantially in recent days as the US dollar and 2 year yields have both traded lower since last Friday’s nonfarm payrolls report. Today’s meeting minutes revealed that some fed members were concerned that their own projections of rate hikes would be misinterpreted that the overall policy stance was being shifted towards a more hawkish strategy.

The FOMC is obviously facing a communications problem as the above situation doesn’t make much sense. Individual Fed Governors and regional Presidents forecast rate hikes for a particular time in the future, then say they don’t want markets to take these projections for face value. This fire fighting strategy has been seen before in various cases. Each time in the last year when Fed communication has moved stocks lower and rates higher, they have attempted to downplay whatever was said to incite the prior market reaction.

I can remember vividly July 11th, 2013. The weeks prior had seen massive US dollar buying and rising money market rates as recent comments by Bernanke had led markets to believe that tapering of asset purchases was imminent. The FOMC minutes released on July 11th, along with a Bernanke speech that evening were egregiously dovish. Bernanke intentionally came out dovish as possible, almost with an aura of “I forgot what I said last week”. During the three hours between the FOMC minutes and Bernanke’s speech the USD fell nearly 400 pips versus the EUR in one of the fastest and largest moves I have ever seen.

The September “no-taper” was again the FOMC fighting fires to never let the markets actually think rates are rising any time soon. I agree with the cliché of never fighting the Fed, but when the time comes Dollar bulls won’t need to. Ultimately US economic data will drive the expectations of when rate hikes will happen and unlike the previous cases of the FOMC diving for the fire extinguisher, this time recent US data has been good as labor markets grow by around 200k jobs per month.  Dollar bulls should remain on the sideline until there is an abrupt change in sentiment. The continued suppression of any upward moves in US rates is only delaying what will likely be a massive reaction once the picture becomes undeniably clear that rates will go up.