EC Another Missed Opportunity

March 16 – Financial Times (Robin Wigglesworth, Joe Rennison and Nicole Bullock): “When Romeo impatiently hankered after Juliet, the sage friar Lawrence dispensed some valuable advice: ‘Wisely and slow; they stumble that run fast.’ It is a dictum the Federal Reserve clearly intends to live by, despite the improving economic outlook. There have been rising murmurs in financial markets that after years of the Fed being too optimistic on the economy, inflation and interest rates, it is now behind the curve. But on Wednesday the US central bank sent a clear message to markets that it is not in a hurry to tighten monetary policy.”

Yes, markets had begun fretting a bit that a sense of urgency might be taking hold within the Federal Reserve. But the FOMC’s two-day meeting came and went, and chair Yellen conveyed business as usual. Policy would remain accommodative for “some time.” The focus remains resolutely on a gradualist approach, with Yellen stating that three hikes a year would be consistent with gradualism. And three baby-step hikes a year would place short rates at 3.0% in early 2020 (the Fed’s “dot plot” sees 3% likely in 2019). It’s not obvious 3% short rates three years from now will provide much restraint on anything. As such, the Fed is off to a rocky start in its attempt to administer rate normalization and a resulting tightening of financial conditions.

Yellen also suggested that the committee would not be bothered by inflation overshooting the Fed’s 2.0% target: “…The Fed is not inclined to overreact to the possibility that inflation could drift slightly — and in the Fed’s view temporarily — above 2% in the coming months.” There would also be no reassessment of economic prospects based on President Trump’s agenda of tax cuts, infrastructure spending and deregulation. “We have plenty of time to see what happens.” Moreover, the Yellen Fed did not signal that it is any closer to articulating a strategy for reducing its enormous balance sheet.

Bloomberg had the most apt headlines: “Yellen Calms Fears Fed’s Policy Trigger Finger Is Getting Itchy;” “Yellen Faces New Conundrum as Conditions Defy Hike;” “The Market Is Acting Like the Fed Cut Rates.”

Ten-year Treasury yields (TNX) dropped 11 bps on FOMC Wednesday to 2.49%, the “largest one-day drop since June.” Even two-year yields declined a meaningful eight bps to 1.30%. The dollar index fell 1.0%, with gold surging almost $22. The GSCI commodities index rose more than 1%. EM advanced, with emerging equities (EEM) jumping 2.6% to the high since July, 2015.

I think back to the last successful Fed tightening cycle. Well, I actually don’t recall one. Instead it’s been serial loose financial conditions and resulting recurring booms and busts. And, once again, the Fed seeks to gradually raise rates without upsetting the markets. Yellen: “I think if you compare it with any previous tightening cycle, I remember when rates were raised at every meeting, starting in mid-2004. And I think people thought that was a gradual pace, measured pace. And we’re certainly not envisioning something like that.” Heaven forbid…

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Doug Noland is not a financial advisor nor is he providing investment services. His posts do not provide investment advice and Doug Noland's comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. The Credit Bubble Bulletins are copyrighted. Doug's writings can be reproduced and retransmitted so long as a link to his post is provided.

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