Category: Monetary Policy

The Market’s Overreaction to Perceived Fed Dovishness is not Unexpected

The extremely dovish market reaction to the outcome of the FOMC meeting was more a function of the dot-plots than the FOMC statement or Yellen’s press conference. 

Methodologically, we have argued that the Federal Reserve is like the Chinese Communist Party in that policy emanates from a central committee.  That central committee at the Federal Reserve is composed of Yellen, Fischer and Dudley.  The FOMC statement is their organ–the most succinct expression of their views.

The FOMC Minutes Run Out of Patience

The Federal Reserve met the widespread market expectations.  It dropped the word patience and recognized growth had moderated.  It wanted to see more improvement in the labor market and needs to be confident that inflation will move toward its target in the medium term. 

The FOMC Meeting is This Week’s Highlight

The Federal Reserve meeting is the highlight of the week.  The most pressing issue is the continued evolution of its forward guidance that will maximize the room to maneuver.  Until now, officials have indicated that they are in no hurry to begin raising interest rates.  They have offered investors word cues of its intent.

Fair or Unfair, the US FOMC Meetings Trump other Central Banks

The most important event next week is the FOMC meeting followed by a press conference by Yellen.  In order to maximize its room to maneuver, we expect the FOMC statement will drop the patience that has characterized its forward guidance since last December.

Let the Euro Sovereign Bond-Buying Commence, and the Next Act in Greece Enters the Stage

The euro finished last week three standard deviations below its 20-day moving average.  Even though the returns in the foreign exchange market are not normally distributed, this is a rare event, and reflected the stretched technical condition of the dollar following the stronger than expected US jobs data.  After a slow start in Asia, the euro climbed from a little below $1.0825 to $1.0900, where sellers awaited.  

Consequences of Divergent Monetary Policies

The key fundamental fact that is shaping the investment climate was underscored last week.  The ECB announced that it will begin its accelerated asset purchases on March 9.  The following day the US reported a sufficiently robust employment report to reinvigorate expectations that the Federal Reserve will raise rates before the end of the summer.  

As Expected, the ECB’s Draghi Provided Little Insight

ECB’s Draghi failed to provide much fresh insight into implementation of its asset purchase program.  The details will be posted on the ECB’s web site later.  

The more important information comes from the ECB’s new forecasts.  CPI this year is now expected to be zero, which implies more price pressures beginning later this year.  CPI next year has been tweaked higher to 1.5% and 1.8% in 2017.  The 2017 forecast has been introduced for the first time, and suggests the ECB’s mandate will be achieved by the end of that year.  

Lower Your Expectations about Policy Changing Statements from the ECB

The ECB meets tomorrow.  We do not attribute any significance to its location in Cyprus.  A couple times a year, the ECB meets outside of Frankfurt. 

Fallout from Yellen’s Comments to the Senate Continue

The dovish take to Fed Chair Yellen’s testimony yesterday has continued to weigh on the dollar and support global bond markets.  Equities are mixed with the major markets lower while emerging markets have rallied.  The MSCI Emerging Market equity index is up about 0.8% to reach its highest level since early last December.