For Fed watchers, it's all in a word......

Thursday 30th July 2015

 

For Fed watchers, it's all in a word......

 

"Fed has global investors begging  --  and then "some" ", Sam Fleming in The Financial Times, p.7

Any newcomer to the markets might be amazed to witness just how much can be read into so little, especially when in reality nothing much was said that we didn't know already. Yesterday's eagerly awaited announcement by Fed Chairwoman Janet Yellen at the end of the Fed's Open Market Committee's 2 day meeting is a case in point.

The Fed some time ago abandoned the idea of giving commitments on the timing of monetary policy changes -- very sensibly too. Such a practice can only hold them as a hostage to fortune when things don't turn out as expected, which they quite regularly don't. Hence the forensic examination of the text of Ms Yellen's statement in the search for clues as to the timing of rate rise.

In this instance, the addition of a single word has been deemed  significant. In its previous statement, the Fed said that it would wish to see "further improvement" in the jobs market before taking action on rates. Last night, the phrase was amended to "SOME further improvement". See the difference ? One might legitimately wonder whether such not-so-subtle word games are really the optimum method for the Fed to communicate with the market, but that's just the way it is. Anyway, the judgement is that a rise in September is marginally more likely than it was 24 hours ago.

 There are still obstacles to assuming a September lift-off, primarily a lack of inflationary pressures. The Fed's  target of 2.0% still seems some way off, though a buoyant jobs market should go quite a long way to boosting inflation data. But although the Fed believes that the slump in the price of oil will work itself out of the numbers, the recent resumption of a downward move in oil prices (and in commodities generally) will not be entirely welcome. Nor will the strength of the dollar, which puts a dampener on both trade (and therefore growth) and on inflation.

 Between now and the September meeting, all eyes will be on employment, growth and inflation data. First up : US 2nd quarter GDP later today ..... consensus forecast 2.8 / 2.9%, after the disappointing Q1 number of -0.2%.

NOTE : Obviously the timing of the first rate rise is important to professionals involved in that end of the market, but the wider world might be wondering just what all the fuss is about given that a big majority expect a rise by the end of the year whether it's September or December. Of more concern is the pace and extent of further rises. On June 17th the Fed projected their benchmark rate to rise to 1.625% in 2016. Prices in futures markets imply that this looks toppy, and given ongoing uncertainties the futures markets may be right. Needless to say, once the first rise is out of the way speculation will immediately start as to the timing of the next one, and the whole process will start again.