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.