More of the same from the mouth of the FOMC. Monetary policy has replaced fiscal policy as the “only game in town” and this has ENABLED Janet Yellen to be the final arbiter of all things in financial valuations. The concept of the dual mandate has morphed into a triple mandate as the turmoil of the global financial system weighs heavily upon the Fed’s ultimate decision to raise interest rates a mighty 25 basis points. Ms. Yellen sits upon the throne of financial power wielding a trident as she decides the fate of a “global sea of liquidity.”
Inflation not high enough, hold rates at zero. Employees desiring to work full-time but cannot get the needed hours. Labor conditions index does not warrant a rate increase even if hourly wages are pushing higher at the fastest rate in years. If the previous mandates are being achieved, we have to “be attentive to the negative spillovers from international events” for we don’t wish to have global problems create a needless misunderstanding.
No question, the Fed is trapped by its fear of upsetting the financial markets as they did with the infamous “taper tantrum” in May 2013. The fear factor, however, is getting old and the market’s response to the tripe offered by Yellen in her press conference was met by the market’s “rational exuberance.” At first the market reacted to the Summary Economic Projections (SEP) and FOMC statement with the previous correlative trading.
The DOT PLOT was diagnosed as projecting a possible outcome of two rate rises before the end of the year. The initial response was a moderate dollar bid, the interest rate futures being sold and the already-soft precious metals market remaining offered. The traditional market response performed a total rethink about the FED and the U.S. dollar sold; gold and silver went bid, and, the most telling of all was the late dramatic move in the U.S. yield curves. The greatest move was the 5/30 as the U.S. five-year futures rallied and the 30-year contract remained on the offer. The 2/10 curve exhibited a steepening but not as dramatic as its more speculative cousin.
This is only an initial reaction, but if it sustains itself for the next few days–further steepening with a weak dollar–the FED will have a problem. Its credibility will be at risk but I caution that this will be a process to be played out over time. The GOLD market is technically in bear trend and most large hedge funds are short GOLD as Greece and Russia have not provided any support for the GOLD bulls. But it may well be the “Fed’s credibility factor” that buoys the bulls. Interesting trade dynamic was the SPOOS as the equity market performed as expected as the weak dollar and the steepening curves gave new fuel to the equity bulls. By the close the SPOOS had surrendered its initial bullish response. Again, these are indicators that need to be watched to determine if the market is as FED UP WITH THE FED as I am. Janet Yellen needs to dust off FDR for “there is nothing to fear but fear itself.”