Updated: 04-15-2015We're not sure the Federal Open Market Committee (FOMC) necessarily rode to the rescue with its latest policy directive, yet it sure took anyone for a ride who was fretting that the removal of the word "patient" from its policy directive was going to rock the stock and bond markets.
The FOMC did in fact remove the word, yet the only asset it rocked by doing so was the U.S. dollar. Everything else rocked and rolled. Stock, bond, and commodity prices danced together as if they were in a mosh pit of celebration.
- The 2-yr Treasury note yield, which stood at 0.68% just before the release, is now 0.55%.
- The S&P 500, which scraped 2061 in front of the directive's release, is now at 2105.
- Gold prices, which were $1152/troy oz. in front of the release, are now crossing at $1173.30 after the release.
- The U.S. Dollar Index, which was at 99.40 in front of the release, dropped to 98.07 after its release.
The reason these assets moved the way they did is that the totality of the directive skewed to the dovish side of things. It did that simply by not sounding hawkish at all, yet it was laced with verbiage, and accompanied by updated central tendency projections
, that implied a rate hike in June is a low probability. To that end, there was an acknowledgment that:
- Export growth has weakened
- Inflation has declined further below the Committee's longer run objective
- Inflation is anticipated to remain near its recent low level in the near term
- The central tendency projection for real GDP growth was lowered for 2015, 2016, and 2017; and
- The central tendency projection for PCE inflation and core PCE inflation was lowered for 2015 and 2016
The directive clarified that the change in forward guidance does not indicate the Committee has decided on the timing of the initial increase in the target range, yet it was acknowledged that a rate hike at the April meeting remains unlikely.
It is the Committee's belief that a rate hike will be appropriate when it has seen further improvement in the labor market and is "reasonably confident" that inflation will move back to its 2 percent objective over the medium term. The market itself isn't reasonably confident inflation will move back toward the Fed's 2 percent objective anytime soon, so it has embraced the view that the FOMC will remain patient in raising the fed funds rate.
There can be no other interpretation of matters when assessing the initial response to the directive, the updated projections, and the Fed Chair's press conference.
Other truths that became self-evident after the latest directive are the following:
- Anybody who says the market isn't driven by the Fed's policy shouldn't be listened to
- Anybody who doubts the Fed's data dependency should lose those doubts
- Anybody who thinks Janet Yellen isn't in control of the FOMC should think again. Notwithstanding some waves from other Fed members about the need to raise rates sooner rather than later, the vote for the policy action at the March 17-18 FOMC meeting was unanimous; and
- Anybody who thinks the U.S. economy is in solid shape can't be right, because the FOMC's ongoing embrace of its zero interest rate policy says quite clearly that they are wrong
--Patrick J. O'Hare, Briefing.com