More dodgy US numbers, but the Fed talks the talk.......

Thursday 30th April 2015

  

More dodgy US numbers, but the Fed talks the talk.......

"Fed concedes US recovery has lost momentum" , The Financial Times, p.1

After contemplating yesterday how central banks now approach the tricky issue of signalling their thinking to the market, or indeed of hiding it, we were immediately presented with a case in point. Q1 US GDP rose just 0.2%, the latest in a batch of hugely disappointing numbers that has delayed expectations of when the Fed will begin to hike rates. Few analysts still believed that rate rises would start as early as June, originally the favoured date before the slew of bad numbers, and now many doubt that we will see any Fed action before year-end. 

The GDP had a predictable effect on the markets, only for moves to be partially reversed by the Fed's later statement. They pointed out that the data was affected by transitory factors, such as a harsh winter and port strikes. This is of course true to a degree, although the effect of the strong dollar on exports may have had more to do with things and that is not so transitory whilst the market expects the Fed to be the first central bank to move on rates. It is also true that every first quarter since 2010 has been poor compared with the rest of the year.

One could argue that the Fed is always likely to make vaguely hawkish statements after soft numbers and doveish statements after strong ones to avoid market overreactions. But essentially, what the Fed was doing was keeping all its options open. We may have pondered yesterday over whether central banks might show greater transparency with regard to their thinking on monetary policy, but for now the Fed seems happy to keep us guessing.