Federal Reserve chair Janet Yellen said on Wednesday that the central bank could begin shrinking its $4.5tn balance sheet “relatively soon“, and while she demurred on a specific date, some analysts have now pegged that announcement for September — although others aren’t so sure.
Over the past few months, analysts have tried to piece together a clearer picture of the Fed’s timing for moving on the three expected interest-rate increases this year, as well as when it intends to start the process of unwinding its massive balance sheet.
On Wednesday, the Fed moved forward with its second rate rise of 2017 and unveiled some details of its plan to shrink the balance sheet that has grown to a massive size in the wake of the financial crisis. That has left analysts to ponder when to expect the Fed’s next moves at its four remaining meetings of the year.
In a note following today’s announcement, Bank of America Merrill Lynch analysts said in a report that they now expect the balance sheet normalisation to begin in September, with the third rate increase of 2017 penciled in for December:
We can now close the case on who leaked that confidential, market-moving data to Medley global back in 2012: it was Richmond Fed’s Jeffrey Lacker, who previously was expected to retire in October, and is resigning immediately.
In a statement, Lacker confirms he revealed confidential FOMC information to Medley Global and that he lied to the Fed’s general counsel on at least two occasions. His full statement is below:
Statement Of Dr. Jeffrey Lacker
During the past 13 years it has been my privilege to serve as President of the Federal Reserve Bank of Richmond. It has also been an honor to contribute to the development of our nation’s monetary policy as a member of the Federal Reserve’s Federal Open Market Committee (“FOMC”).
While transparency of the monetary policy process is important, equally important are the confidentiality policies that protect the internal deliberations of the FOMC and ensure the integrity of our financial markets. The Federal Reserve’s confidentiality policies seek to guide participants in maintaining the balance between transparency and confidentiality. The FOMC has had in place for many years two specific policies relating to confidentiality. the FOMC Policy on External Communications of Committee Participants (the “External Communications Policy-) and the Program for Security of FOMC Information (the “Information Security Policy”).
In 2012, my conduct was inconsistent with those important confidentiality policies. Specifically, on October 2, 2012, I spoke by phone with an analyst (“the Analyst”) concerning the September 2012 meeting of the FOMC. The Analyst authors reports on Federal Reserve matters on behalf of Medley Global Advisors (“Medley’). Medley publishes macro-economic policy intelligence for institutions such as hedge funds and asset managers and is owned by the Financial Times Limited.
Two rate hikes since last year have weakened the dollar. Why is that, and what’s ahead for dollar, currencies & gold? And while we are at it, we’ll chime in on what may be in store for the stock market…
The chart above shows the S&P 500, the price of gold and the U.S. dollar index since the beginning of 2016. The year 2016 started with a rout in the equity markets which was soon forgotten, allowing the multi-year bull market to continue. After last November’s election we have had the onset of what some refer to as the Trump rally. Volatility in the stock market has come down to what may be historic lows. Of late, many trading days appear to start on a down note, although late day rallies (possibly due to retail money flowing into index funds) are quite common.
Where do stocks go from here? Of late, we have heard outspoken money manager Jeff Gundlach suggests that bear markets only happen if the economy turns down; and that his indicators suggest that there’s no recession in sight. We agree that bear markets are more commonly associated with recessions, but with due respect to Mr. Gundlach, the October 1987 crash is a notable exception. The 1987 crash was an environment that suffered mostly from valuations that had gotten too high; an environment where nothing could possibly go wrong: the concept of “portfolio insurance” was en vogue at the time. Without going into detail of how portfolio insurance worked, let it be said that it relied on market liquidity. The market took a serious nosedive when the linkage between the S&P futures markets and their underlying stocks broke down.
With a rate rise in the books investors get to hear from a handful of Federal Reserve speakers next week. On the geo-political front a hearing on Russia’s interference in the US presidential election and a meeting on combatting Isis take the spotlight.
Here’s what to watch in the coming days.
While the Federal Reserve decided to raise interest rates for the third time since the financial crisis, chair Janet Yellen reiterated that the pace of rate rises would be gradual and the so-called dot plot continued to signal just two additional rate rises this year. The move was interpreted by some as a dovish hike and Fed speakers could get the chance to refute that next week.
“Moreover, we’d also look for clarification on the addition of ‘symmetric’ in the press statement when it came to defining the inflation reaction function,” strategists at RBC Capital Markets said. “Our sense is that this was in an effort to put an end to inflation level targeting—also not a dovish development.”
Ms Yellen will deliver the opening keynote at the Federal Reserve System Community Development Research Conference in Washington on Thursday. Through the week, investors also get to hear from voting members of the monetary policy setting Federal Open Market Committee, including Chicago Fed president Charles Evans, Dallas Fed president Robert Kaplan and Minneapolis Fed president Neel Kashkari — the only voting FOMC member to dissent at the March meeting and who has explained his rationale for the move on Friday.
On the economic data front, the calendar is fairly light but investors will keep an eye on fourth quarter current account deficit figures due Tuesday and durable goods orders slated for Friday.
The odds of a March hike rose to 94% on Friday compared to 35% on Feb 23. A concerted, coordinated effort from the Fed to push up the probability was clear by the end of the week.
If she didn’t intend to stoke hike optimism, then she badly misplayed her hand. The newspaper headlines today were:
Set to Lift Interest Rate, Fed Embraces Investors’ Optimism – NYT
Yellen points to March rate hike as Fed signals end of easy money – Reuters
Yellen signals another Fed interest rate hike – PBS
Janet Yellen Indicates Federal Reserve’s Rate Rise Coming This Month – Forbes
What would it take for the Fed not to hike? How about a +50K non-farm payrolls report with weak wage growth. That would definitely make things interesting.
Barring something like that, the debate will shift to future meetings. At the moment, there’s a 10% chance priced in of a second hike on May 3. That rises to 45% by the June 14 meeting. Three hikes by year-end are about a 50/50 probability.
Stocks inched upward Friday after remarks by Federal Reserve Chair Janet Yellen pointed to a rate hike later this month.
The Dow and S&P 500 posted fractional gains. The blue chips barely finished higher on the day, up 3 points and staying above 21,000, ending at 21,005.71.
Climbing 0.2% was the Nasdaq composite, to 5870.75.
“At our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” Yellen said in a 1 p.m. ET speech at the Executives’ Club of Chicago.
While Yellen couched her remark in conditional terms that depend on economic data, she preceded it by citing a job market that has been “strengthening” and inflation that has been “rising toward our target” of 2% annually.
Several other Fed officials in recent days have indicated the Fed’s policymaking committee is likely to raise its benchmark short-term rate at a March 14-15 meeting.
Stocks jumped to new record highs and the Dow shot past 20,600 on Wednesday after more reports showed the U.S. economy continues to strengthen.
The Dow Jones industrial average climbed 107 points, up 0.5% to a new closing high of 20,611.86.
Also building upon their record highs set in the previous session were the S&P 500 and Nasdaq composite, up 0.5% to 2349.25 and 0.6% to 5819.44, respectively.
The encouraging data could push the Federal Reserve to raise interest rates more aggressively from the record lows marked during the Great Recession.
Wednesday’s economic reports give the Federal Reserve more encouragement to raise interest rates, and economists said the possibility is increasing that it may happen at the central bank’s next meeting in March. Retailers had stronger sales in January than economists expected, and inflation at the consumer level was the highest in years. Consumer prices rose 2.5% in January from a year earlier, the highest rate since March 2012.
Fed Chair Janet Yellen said in testimony before a Congressional committee that the strengthening job market and a modest move higher in inflation should warrant continued, gradual increases in interest rates, echoing her comments from a day earlier. The central bank raised rates in December for just the second time in a decade, after keeping rates at nearly zero to help lift the economy out of the Great Recession.
The FOMC Minutes are due today at 2 pm ET (1900 GMT)
The economic calendar is light today so it’s all about flows to start the year and the FOMC Minutes later in the day.
In general, the Minutes are a release that always gets more attention than deserved. It’s rare the report moves the market and the initial move is often reversed.
But that might not be the case this time because the FOMC hiked rates at the December meeting and left the timing on subsequent rate moves ambiguous. The big market driver was the change in the dot plot.
Here is September compared to December:
Meanwhile, in the press conference Yellen emphasized that the thinking at the Fed hadn’t changed much.
“The shifts that you see here are really very tiny,” she said about the dot plot.
The FOMC decision is out at 2 pm ET (1900 GMT). At the same time, the Fed releases the dot plot and its new round of economic projections. Roughly 30 minutes later, Janet Yellen hosts a press conference.
2) The dot dance
Where the dots are located doesn’t matter. The Fed has been higher than the market since the inception of the dot plot and has always been wrong. What matters is the movement in the overall plot. If the blue dots generally move higher, it’s a hawkish signal. If they stay where they were in September, that will be USD negative.