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Predicting US Fed stance not easy proposition (Column: Currency Corner)
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By Vatsal SrivastavaIt would be hard to put the Federal Open Market Committee (FOMC)
minutes released Wednesday night under the hawkish or dovish category.
The markets traded within a very narrow range post the release of the
minutes, making it quite a non-event.
The dollar, however,
finished higher against all major currencies except the pound, which
meant that the currency market is factoring in a September rate hike.
Here are the main takeaways from the FOMC minutes:
No June hike
The
key lines from the FOMC minutes with regard to the timing of upcoming
Fed rate hike: "A few anticipated that the information that would accrue
by the time of the June meeting would likely indicate sufficient
improvement in the economic outlook to" justify tightening. "Many
participants, however, thought it unlikely that the data available in
June would provide sufficient confirmation that the conditions for
raising the target range for the federal funds rate had been satisfied,
although they generally did not rule out this possibility."
Now,
the question is whether the liftoff is in September or December. The
markets is pricing a September rate hike but going by the poor prints in
all leading indicators of economic activity - retail sales, consumer
sentiment, manufacturing growth and tepid wage growth, this column still
thinks that Fed chief Janet Yellen will only tighten in 2016.
Growth will resume but only moderately
Most
FOMC members "continued to see the risks to the outlook for economic
growth and the labor market as nearly balanced." Economic data releases
over the next month will tell us whether the sharp slowdown in the first
quarter were due to seasonal disruptions as the severe winter took its
toll on the economy and the disputes on the west coast ports led to a
major slowdown in shipping.
The minutes further added: "Most
participants expected that, following the slowdown in the first quarter,
real economic activity would resume expansion at a moderate pace, and
that labor market conditions would improve further."
Fed is worried about market volatility
The
1994 bond market turmoil and the taper tantrum of 2013 are fresh in the
FedÂ’s mind and they will do all they can to smooth out market
volatility. The key point here is that one can safely assume that even
if they press the monetary tightening button in September, they will be
watching the market price action very closely and will only hike at
gradual Fed meetings if there is no evidence of a sharp bond market sell
off.
The FOMC indicated some concern about Treasury yield
volatility once tightening commences. "It was suggested that the
tendency for bond prices to exhibit volatility may be greater than it
had been in the past, in view of the increased role of high-frequency
traders, decreased inventories of bonds held by broker-dealers, and
elevated assets of bond funds."
(21.05.2015. Vatsal Srivastava
is consulting editor for currencies and commodities with IANS. The
views expressed are personal. He can be reached at
[email protected])