Why do I say this? As expected, the FOMC ended QE3 and left in the forward guidance of “considerable time.” Some analysts believe that the balance of the statement was HAWKISH because the phrase of “significant underutilization of labor resources” to “underutilization of labor resources is gradually diminishing.” The problem is that Chair Yellen has adopted the Labor Market Conditions Index (LMCI) and its 19 variables so without a press conference or until we read the FOMC minutes we have no basis for the change in “significant underutilization” language. The lack of a press conference left investors dazed and confused because there was no explanation for the Fed’s decision. In September we heard about the headwinds of global slowdowns and a strong dollar, but there is no a word about GLOBAL HEADWINDS in the Fed’s statement.
Yesterday, the Riksbank cut rates as they worried about deflation impacting its overly indebted economy. Today, the Reserve Bank of New Zealand announced that it was holding its rates steady at 3.5 percent and noted that it remains concerned about the overvalued KIWI DOLLAR and called its “… current level unjustified and unsustainable and continues to constrain growth in the tradeables sector. We expect a further significant depreciation.” Governor Wheeler also noted the weakness in global financial conditions and global inflation is being constrained by falling commodity prices. It appears that the FED lent the RBNZ the word significant so it can tell the market about the overly valued KIWI DOLLAR. But I digress. The bottom line is that where other central banks provide far more clarity about their rate decisions the FED provides nothing about its global outlook. Again, no press conference renders this FOMC statement moot .
It gives the release of the FOMC MINUTES far greater importance for comprehending the Fed’s thought process. The markets’ response seems to be right if the statement is indeed deemed HAWKISH—DOLLAR RALLY, GOLD CRUSHED, FLATTENING YIELD CURVE (especially the 5/30) and EQUITIES initially breaking but rallying back to almost unchanged in noting that the FED may be on hold for longer than the initial analysis suggested. Bottom line, the FED needs to be more comprehensive in its global analysis and that does not mean openly opining on the U.S. dollar. Global deflation was the ghost spooking markets all week but its seems to have not rung the bell of the Federal Reserve. Zero interest rates will continue on a global basis. The question remains how ZIRP will impact various asset classes. Stay vigilant.
Tags: Fed, FOMC, global headwinds, Janet Yellen, Kiwi, QE3, RBNZ, U.S. Dollar, ZIRP
October 29, 2014 at 5:33 pm |
Not impressed with this-and I think the Fed is getting increasingly political. Let’s see what happens after elections in November.
October 29, 2014 at 5:42 pm |
The more the Fed tries to become clear and transparent, the more they fail in delivering “forward guidance”. Ineptitude or game theory? Like Miss Clairol, “Only her hairdresser knows for sure.”
Which is it Professor Yellen?
October 29, 2014 at 8:04 pm |
“underutilization of labor resources is gradually diminishing.”
The victory clasp! Great way to finalize QE.
October 30, 2014 at 8:38 am |
Yra- Agree with your analysis.
To me, all the FED statements are pretty meaningless. Their actions are always “data dependent”, So if the economy get a lot stronger, they will start tightening? Doesn’t everyone know this?
If we are relying on the FED’s economic forecasting capability …….well, there record is about as good as the guy at the Burrito Buggy.
October 30, 2014 at 9:26 am |
Letting go of Daddy’s hand… It is a nice irony that QE has tended to be championed by those on the Krugmanite left but it has delivered huge profits to many on the right, who fondly claim that their wealth is the result of their own success, and not any official intervention. Point.
http://www.economist.com/blogs/buttonwood/2014/10/markets-0
October 30, 2014 at 12:25 pm |
Yra, great post as always. The characterization of labor has had a half life from the very beginning. The hawks (while they’re still around) are squawking as loud as possible and causing quite the internal debate. Hopefully two way trade continues and doesn’t risk what feeble growth we have. What’s risking $17T on a model amongst friends anyways?!
http://www.ravenrumblings.com/?p=267
October 30, 2014 at 1:21 pm |
[…] Why do I say this? As expected, the FOMC ended QE3 and left in the forward guidance of “considerable time.” Some analysts believe that the balance of the statement was HAWKISH because the phrase of “significant underutilization of labor resources” to “underutilization of labor resources is gradually diminishing.” The problem is that Chair Yellen has adopted the Labor Market Conditions Index (LMCI) and its 19 variables so without a press conference or until we read the FOMC minutes we have no basis for the change in “significant underutilization” language. The lack of a press conference left investors dazed and confused because there was no explanation for the Fed’s decision. In September we heard about the headwinds of global slowdowns and a strong dollar, but there is no a word about GLOBAL HEADWINDS in the Fed’s statement. […]
October 30, 2014 at 5:35 pm |
Thanks for all the comments—next we will get back to japan and look at the global macro from there