A “dot plot” of Fed-expected rate hikes vs. market-expected rate hikes shows convergence towards the market’s view.
In December, Fed Chair Janet Yellen expected four rate hikes this year. So did various Fed governors.
On March 21, Atlanta Fed president Dennis Lockhart went out on a limb by proposing a hike in April. The market slapped him silly.
For my take on Lockhart’s position, please see GDPNow Forecast Plunges to +0.6%; Tracking Lockhart’s Momentum with Pictures.
Following weak economic reports and Yellen’s speech yesterday, the “dot plot” of expected hikes further converged.
Wall Street is clearly happy with that change. But is it a good thing for the Fed to outsource policy to market expectations?
Market Rallies Around Dovish Fed
I commented yesterday on the market’s reaction to Yellen’s speech. Today mainstream media is on the case.
Reuters reports Wall St. Rallies as Fears of Imminent Rate Hike Fade.
Yellen, in her first remarks since the Fed held steady on rates earlier this month, said inflation in the United States had not yet reached sustainable levels amid uncertainty about China’s economy and low oil prices.
Yellen’s stance contrasts with recent comments from other policymakers who have voiced support for more than one increase this year.
Markets around the world cheered Yellen’s remarks, which suggested that a rate hike was not immediately on the horizon. The dollar fell more than a percent, while bond prices rallied.
Yellen Outsources U.S. Monetary Policy to the Financial Markets
Bloomberg reports Yellen Outsources U.S. Monetary Policy to the Financial Markets.
The Federal Reserve looks to have outsourced monetary policy to the financial markets — and that may not necessarily be bad.
Fed Chair Janet Yellen told the Economic Club of New York on Tuesday that policy makers had scaled back the number of interest rate increases they expect to carry out this year after investors did the same.
“That’s a good thing,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, commenting on the sequence of actions. “Monetary medicine gets into the blood stream faster if the public can anticipate what the Fed’s response to an economic shock will be.”
“The risk is that markets’ perception of such continued accommodation will embolden them even more to try to force the policy hand of the Fed,” Mohamed El-Erian, chief economic adviser at Allianz SE and a Bloomberg View columnist, said in an e-mail.
Indeed, investors in the federal funds market are betting that the central bank will raise rates just once this year, not the two times policy makers envisage.
‘Ideal World’
It’s an “ideal world” when central bankers and financial market participants are in sync on how monetary policy should respond to incoming economic data, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. In that case, “the expected path of policy rates should adjust before even the Fed moves.”
Unfortunately, “we haven’t gotten to that point,” Feroli added — in spite of Yellen’s embrace of the market’s latest moves in her speech.
Dot Plot Convergence
Deciphering the Dove
Former Dallas Fed Richard Fisher was on CNBC this morning discussing the dot plot.
“The central bank is living in constant fear of market reaction and that is not the way to manage policy,” said Fisher.
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I picked up that video from ZeroHedge who commented Former Fed President: “Living In Constant Fear Of Market Reaction Is Not How You Manage Central Bank Policy”.
Yellen Yap Further Discussion
- Yellen Gets Lovey-Dovey in Speech Citing “Other Tools” and More QE
- Measuring the Effect of Yellen Yap: “Ooh wee baby, I sure show you a good time”
Rate Hike Odds September
‘Ideal World’ Rebuttal
Michael Feroli, chief U.S. economist at JPMorgan Chase says “In the ideal world, central bankers and financial market participants are in an sync on monetary policy.”
Nonsense. In the “ideal world” central banks would not manipulate markets nor attempt to manipulate market opinions.
In fact, there would be no central banks at all in the “ideal world”.
Proof is obvious: Look at the mess central banks have made with their asymmetrical, moral hazard policies, blowing bubble after bubble with increasing magnitude over time.
Mike “Mish” Shedlock
**Former Dallas Fed Richard Fisher was on CNBC this morning discussing the dot plot.
“The central bank is living in constant fear of market reaction and that is not the way to manage policy,” said Fisher.**
FORMER. A hundred former FED members can speak in unison and the FED will not hear, because they no longer have a vote. They are an empty echo chamber, signifying nothing.
Greenspan was said to be a gold bug. He is said to be a gold bug now.
There is this little stretch of 18 years where he threw all that out the window. Why? Because he was FED chairman. When it mattered, he wasn’t a gold bug. That is all that matters.
“It’s an “ideal world” when central bankers and financial market participants are in an sync on how monetary policy should respond to incoming economic data, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.”
Yeah, well, (recessionary) Inventories / Sales doesn’t give a damn about your “sync”.
Monetary policy won’t do a thing to stop a typical inventory correction led recession that we’re in or about to enter.
Another real world data point “experts” choose to ignore. Rail.
The only words to describe – off a cliff.
And remember when reading the year over year … Q1 2015 GDP +0.6%.
…
WASHINGTON, D.C. – Mar. 30, 2016 – The Association of American Railroads (AAR) today reported U.S. rail traffic for the week ending Mar. 26, 2016.
For this week, total U.S. weekly rail traffic was 470,271 carloads and intermodal units, down 16.5 percent compared with the same week last year.
Total carloads for the week ending Mar. 26 were 232,348 carloads, down 18.5 percent compared with the same week in 2015, while U.S. weekly intermodal volume was 237,923 containers and trailers, down 14.5 percent compared to 2015.
…
For the first 12 weeks of 2016, U.S. railroads reported cumulative volume of 2,905,113 carloads, down 13.7 percent from the same point last year; and 3,085,831 intermodal units, up 2.2 percent from last year. Total combined U.S. traffic for the first 12 weeks of 2016 was 5,990,944 carloads and intermodal units, a decrease of 6.2 percent compared to last year.
https://www.aar.org/newsandevents/Press-Releases/Pages/2016-03-30-railtraffic.aspx
Considering an “Ideal world” for “financial market participants” definitionally is one where they make the most money, that statement says a lot about the world we currently live in.
“Yellen Outsources U.S. Monetary Policy to the Financial Markets”
When looking at historical data the above statement is preposterous. Financial markets have always been in control of interest rates. The FED has always reacted to the change of interest rates discovered by the markets.
Sorry Charley.
I debunked that theory long ago.
Please read my post Fed Uncertainty Principle
http://mishtalk.com/2008/04/03/fed-uncertainty-principle/
That is my personal all-time favorite post.
It is a bit too long-winded now with details happening at the time, but the idea is solid.
Read the entire thing. It gets better as it goes along.
Mish