In the biggest news story of the day, Jon Hilsenrath reported that New Zealand bank Governor Wheeler led his board to hold the line on interest rates. (NOTE: Hilsenrath didn’t report the New Zealand news as he was too busy trying to impact U.S. markets with a tweet here and a tweet there.) The RBNZ did note that the global economic recovery remains “patchy.” The KIWI bank seems content to allow rates to remain on hold for two major reasons: 1. The macroprudential regulations instituted to slow house price inflation need more time to work–New Zealand instituted regulations on loan-to-value mortgages; and 2. “The exchange rate remains high and is a headwind to the traded goods sector. Sustained strength in the exchange rate that leads to lower inflationary pressure would provide the bank with greater flexibility as to the timing and magnitude of future increases in the OCR. Fiscal consolidation is also expected to continue weighing on demand over the next few years.”
The RBNZ is reaping the rewards of good policy and therefore has the luxury of time to allow its initiatives to succeed. Watch the AUD/NZD cross to see how the market interprets the “forward guidance” offered by Wheeler. If the market reads the RBNZ to be more concerned about KIWI strength, and therefore slow in raising rates, the KIWI SHOULD WEAKEN on the various crosses. However, as of yet, the RBNZ is not deemed to be “behind the curve.”
The most anticipated story of the day of course was whether BEN THE TAILOR was going to give some guidance of the future of TAPERING. The market initially failed to respond to the FOMC statement, but it seems that after Jon Hilsenrath released his WSJ article–titled, “December Taper Not Off the Table”–the entire litany of risk based assets tumbled. Hilsenrath’s analysis was based on the removal of September 18 line, “… but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.” MY READ ON THE REMOVAL OF THAT LINE WAS VERY DOVISH FOR IT REPRESENTED THE DIMINUTION OF GOVERNOR JEREMY STEIN. In the famous nod to tapering during the May 22 Congressional testimony, Chairman Bernanke gave credence to Stein’s view on the possibility of QE causing some financial instability by the Fed’s actions creating mispricing across asset classes.
The FED‘s non-tapering at the September meeting reflected the FOMC‘s fears about an early rise in interest rates. There will be no tightening in financial conditions while the present Fed Board is in office … unless of course October’s unemployment number has a nonfarm payroll of 300,000 or higher. But as long as there’s lackluster growth with slowing inflation there will be no tightening of financial conditions. In my opinion, the more important part of the FOMC release is the paragraph og “forward guidance,” where it is said again: “… as long as the unemployment rate remains above 6.5 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer- term inflation expectations well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, THE COMMITTEE WILL ALSO CONSIDER OTHER INFORMATION … (emphasis mine), including additional measures of labor market conditions ….”
This is the most dovish part of the entire statement for it provides the FOMC the latitude to disregard its own thresholds, especially if the LABOR PARTICIPATION RATE continues to remain historically low. This makes all data dependent on Chairman Bernanke’s and Vice-Chair Yellen’s measure of the OUTPUT GAPS. Low employee participation rates provide the Fed policymakers with great flexibility in determining when to change course. As Woody Allen says in Love and Death, “subjectivity is objective.” This is the essence of the Fed’s “forward guidance” as thresholds will be reached when we tell you. The EQUITY markets may be at very high levels and subject to correction, but today’s FOMC statement was dovish.