Brief Fed Comments

The Fed dropped "patient" from the statement, and the 10-year U.S. Treasury rallied 13 basis points to 1.92%. I am unsure what bond bears did in their previous lives, but they seem to be dealing with a lot of bad karma right now.


I will keep my points here relatively short.

• If you have a strong view on the cyclical outlook, the Kreminology around the parsing of Fed statements is a relatively low value-added activity (do young people know what Kremlinology means?). One might as well do it if you are working full time as a rates analyst, but there are more important things to look at. The Fed does have a very large staff working on forecasting, but they are unable to deal effectively with a lot of market uncertainty (for example, what's up with oil?). You only look at what the Fed is saying to judge what their internal consensus is, and their forecasts are only useful if nothing unusual happens. And if nothing unusual happens, straight-line extrapolation often works as a forecasting tool.
• The Fed Statement itself is a bloated mess that looks like something one of my cats dragged home. They need to stop listening to crazy academic theories about forward guidance, and cut their statements back to being a few sentences. The FOMC can attempt to jawbone markets in their speeches if they so wish. It will be just as successful as their attempts to talk up long-term rates over the past six months.
• The newsflow out of the euro area is bewildering. (The Germans, supposedly the major power in Europe, are running around saying "Waah, he gave me the stinkefinger!". Seriously?) If reports are to be believed, there is momentum towards cutting Greece out of the euro area "somehow". (Since the euro is allegedly irrevocable, that "somehow" is going to be interesting.) Until there is at least a thin veneer of stability on that issue, Fed rate hikes seem unlikely.
• The difference between a first rate hike in June versus September is cosmetic. But if hikes are pushed off until September, it raises the odds the economy will have rolled over before the Fed has even hiked once.

(c) Brian Romanchuk 2015