Well we knew it was going to be all about the Brainard, so we figured we might as well wait and see if the uber-dove gets hawkish.
Here was Barclays pre-speech take:
“Federal Reserve Governor Lael Brainard is scheduled to speak on the state of the US economy on September 12. Her speech is a risk event to our call for an interest rate increase at the September FOMC meeting. In our baseline, we expect her to maintain her dovish stance and to convey her concerns about raising interest rates, given the uncertainty over the outlook for inflation. She has previously stated that she would prefer to wait for the next rate hike until realized inflation moves closer to the FOMC’s targets. However, we also see some risk that she could deliver a speech with a hawkish tilt. If Federal Reserve Chair Yellen wants to increase the market-implied probability of a rate hike, this speech is one of her last opportunities. Having one of the more dovish members of the FOMC deliver the message would convey unity at the Board of Governors and would, in our view, increase the possibility of September hike. We will likely take a signal over our call for a September rate hike based on the content of her speech.”
That last line is at the same time understandable but a pathetic comment on the current state of affairs. It’s like we’ve forgotten we’re talking about 25 bps here. Anyway, BOOM, here she is:
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BRAINARD URGES CONTINUED `PRUDENCE' IN REMOVING ACCOMMODATION
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BRAINARD: POLICY SHOULD TILT TOWARD GUARDING AGAINST DOWNSIDE
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BRAINARD SAYS LOW NEUTRAL INTEREST RATES LIKELY TO PERSIST
And here’s the full breakdown from Bloomberg:
Federal Reserve Governor Lael Brainard, in Chicago speech, says “policy today must rely less on the old normal as a guidepost and instead be sensitive to the contours that shape today’s ‘new normal.’”
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Brainard comments in text of speech to Chicago Council on Global Affairs
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Outlines five features of economy that are “particularly noteworthy” for Fed’s policy deliberations
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First, inflation has been undershooting; Phillips curve appears to be flatter
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“To the extent that the effect on inflation of further gradual tightening in labor market conditions is likely to be moderate and gradual, the case to tighten policy preemptively is less compelling”
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Second, labor-market slack has been greater than anticipated
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“In the presence of uncertainty and the absence of accelerating inflationary pressures, it would be unwise for policy to foreclose on the possibility of making further gains in the labor market”
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Employees working part-time for economic reasons still “noticeably above” pre-crisis level; participation rate suggests there’s room for further gains; wage growth showing “continued muted recovery”
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Third, foreign economies matter to U.S. outlook
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Growth in Europe and Japan is low; “despite active and creative monetary policies in both the euro area and Japan, inflation remains below target levels”
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“The experiences of these economies highlight the risk of becoming trapped in a low-growth, low-inflation, low- inflation-expectations environment and suggest that policy should be oriented toward minimizing the risk of the U.S. economy slipping into such a situation”
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Chinese growth will continue to slow
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Fourth, neutral rate likely to remain very low for some time
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Several estimates “imply that it may require a relatively more modest adjustment in the policy rate to return to neutral over time than previously anticipated”
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Fifth, policy options are asymmetric
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Fed funds rate can’t be used as readily now to respond to downside shocks as to upside shocks
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“From a risk-management perspective, therefore, the asymmetry in the conventional policy toolkit would lead me to expect policy to be tilted somewhat in favor of guarding against downside risks relative to preemptively raising rates to guard against upside risks”
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U.S. economy has made “welcome progress” in recent months in some ways, supported by FOMC’s “cautious approach” as well as easing in financial conditions
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Spending has been disappointing outside of consumer spending
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Growth should still pick up in 3Q
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Core PCE higher than yr ago, still “noticeably” below 2% goal
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Brainard concludes: “This asymmetry in risk management in today’s new normal counsels prudence in the removal of policy accommodation. I believe this approach has served us well in recent months, helping to support continued gains in employment and progress on inflation. I look forward to assessing the evolution of the data in the months ahead for signs of further progress toward our goals, bearing in mind these considerations
The market’s take:
Predictable: stocks holding onto gains, yields lower. The VIX remains subdued and the dollar took a sharp dive before recovering:
All in all, this is a relief for markets that were pretty clearly on edge overnight. One might also venture to say that this reduces the chances for the dreaded VaR shock as it ensures - at least for the time being - that volatility will remain artificially suppressed.
As we said on Sunday, this speech was bound to be a whole lot of nothing:
“All eyes are on this “mystery” Brainard speech on Monday where for some reason everyone seems convinced she’s going to inexplicably morph into a hawk in front of our very eyes. Of course we could always be wrong, but our guess is you’ll get a whole lot of obfuscation and “on the one hand…” doublespeak.”
Well that proved to be pretty darn accurate. Here’s a bit of desk commentary from Citi:
“Worry for no need. Fed dove Brainard continues in dovish mode, says "prudence" is needed in removing accommodation. Says case to tighten preemptively is "less compelling."
“This takes September off the table (chance falls to 20%) but back end yields are still elevated. And stocks pop a bit more, S&P up 21 pts to 2137.”
“Recall on Friday, the combination of heavy UST supply, heavy corporate bond supply and thoughts that Ms Brainard was sent out to stump (on short notice) for the hawks spooked markets. That was after some remarks about the BOJ and after the ECB didn't extend its buying program, which markets took to mean the end of CB support.”
“While yes there was heavy UST supply, higher yields helped it find a home, and the Brainard speech was on the docket and not added to warn markets, no conspiracy theories here.”
So say goodbye to September folks. Brainard just killed a whole bunch of hawks with one dovish stone.
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