It’s safe to say that didn’t go precisely as planned.
Stocks closed in the red Wednesday despite a decidedly dovish Fed statement, and frankly it’s hard to know exactly what to make of that. To be sure, the outcome was expected, but even Esther George was on board as the Kansas City Fed chief withdrew her dissent.
It’s not so much that anyone was expecting a monumental rally, but rather the fact that the Fed seems to be questioning its own credibility at this point.
"We are quite uncertain about where rates are heading in the longer term," Yellen told reporters at the post-statement presser. That doesn’t exactly inspire much confidence but it certainly does recall something Bloomberg’s Richard Breslow said early this morning:
“It’s irrelevant what they pretend to think about 2017 or beyond. They do have a fighting chance of sussing out the next six months.”
Apparently Yellen agrees. But the dot plot were of course rolled out anyway and now, 6 officials expect only one hike in 2016 compared to only one official with that view in March.
Here are some of the bullets from Yellen:
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CAUTIOUS APPROACH TO POLICY APPROPRIATE
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PACE OF LABOR MARKET IMPROVEMENT HAS SLOWED MARKEDLY
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BREXIT VOTE FACTORED INTO TODAY’S DECISION
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LABOR MARKET IS STILL HEALTHY, SOME MOMENTUM LOST
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NOT IMPOSSIBLE THAT JULY HIKE COULD HAPPEN
So just as we said here earlier today, “their message changes by the week due largely to the increasing number of variables in the reaction function. Once you have to incorporate everything into your thought process it becomes impossible to make any decisions thanks to the sheer number of competing interests.”
Remember, the odds of a Brexit may have indeed risen, but it’s not as if the Fed didn’t know the vote was coming when everyone was out hawkish just a few weeks ago. They all knew the UK referendum was a potential tail event, and yet they essentially committed to a June hike anyway. When push came to shove, they didn’t have the heart.
“[This] provided a very confusing and conflicting message that raised more questions than were answered,” Jefferies said this afternoon. “Fed officials appear to be conceding defeat on their communications campaign following the April FOMC meeting, which had resulted in a strong repricing of the probability of a mid-year rate increase,” Bloomberg Intelligence adds.
Goldman’s quick take was simply this: “The statement and SEP were more dovish than expected in several respects.”
This was more of a slow motion trainwreck than it was an absolute debacle, but at the end of the day, stocks closed lower for the fifth consecutive session and the problem for the market now is clearly this: a so-called “dovish relent” failed to boost risk ahead of two more potential landmines (the Bank of Japan and the UK referendum). If the BoJ doesn’t ease, expect the flight to safety (which will of course include the yen) to intensify in the lead up to next week’s Brexit vote.
There was more disturbing commentary at the press conference. Here’s Bloomberg recounting:
“While stronger USD does have ‘depressing effect,’ Fed Chair Janet Yellen says she wouldn’t go so far as to say that there’s a constraint on U.S. monetary policy from policy stance of other countries.
“Yellen also says ‘it’s conceivable’ that Fed might be forced to raise short-term rates so fast that the rates the central bank would pay on reserves could exceed its earnings on its portfolio.”
First of all, it doesn’t exactly inspire much confidence when the Fed chair has to specifically say that monetary policy in the US isn’t being dictated by, i) US corporations, and ii) foreign central banks. The counterfactual there would be this: a stronger dollar weighs on corporate profits so as long as Europe and Japan are easing and China is a wild card, we can’t normalize policy. One certainly hopes that’s not the case.
Second, some commentators have for years been concerned that the Fed could start losing money when rates rise. The fact that Yellen is now discussing this (even to say it’s unlikely) is a bit perturbing.
In any event, watch the BoJ tonight. USD/JPY sunk to 20-month low at 105.44 before bouncing following the Fed decision. If Japan doesn’t play this exactly right, you could see further yen strength - and we’ve seen what that does to US stocks.
Here’s the bottom line, from Jefferies Ward McCarthy:
"The impression they create is that monetary policy is just a drift. It's not clear it's being driven by the dual mandate and the decision-making is just knee-jerk.”
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