Monday, October 13, 2014

Behind the Curtain
Last Tuesday, FRB-NY President Bill Dudley said that the FOMC is likely to start hiking rates around mid-2015. Last Thursday, Fed Vice Chairman Stanley Fischer agreed with Dudley on the timing of the “lift off” for rates. The latest FOMC minutes released last Wednesday strongly suggested that such forward guidance is meaningless since the Fed’s policy remains data dependent. In addition, the economic indicators that are important to the policy-setting committee can and do change. The minutes suggested that the FOMC is now giving some weight to the pace of foreign economic growth as well as the foreign-exchange value of the dollar.

These new considerations might delay lift off. So why have stocks sold off so hard? If the Fed is stymied from normalizing monetary policy by overseas developments, then our wizards might be trapped without an exit strategy. At the same time, there certainly isn’t much the Fed can do to stimulate global economic growth. In fact, if the Fed delays raising interest rates, then the euro might stop its recent freefall, which Draghi is counting on to revive Eurozone growth and inflation. The same can be said for the yen and Kuroda.
(Based on an excerpt from YRI Morning Briefing)

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