No Shortage of Guidance

Prior to last week’s FOMC meeting, several members of the committee suggested that the first rate hike was likely to be approved at their June 16-17 meeting. Now the latest statement and Yellen’s comments at her press conference suggest that this guidance is no longer valid.

Yellen said:

Let me emphasize again that today’s modification of the forward guidance should not be read as indicating that the Committee has decided on the timing of the initial increase in the target range for the federal funds rate. In particular, this change does not mean that an increase will necessarily occur in June, although we can’t rule that out.

So the latest guidance is that anything is possible. Furthermore, consider the following:

(1) The FOMC members’ median estimate for the fed funds rate target at the end of this year was lowered to 0.625% from 1.125% at the end of December. The median projection at the end of 2016 is 1.875%, down from 2.500%, while the longer-run estimate of the fed funds target rate held steady at 3.750%. (Notice that the Fed is forecasting the rate to three decimal points!)

The Fed’s latest guidance tends to confirm our view that “none-and-done” or “one-and-done” are more likely than a normalization of monetary policy over the rest of this year. A fed funds rate of 1.000% by the end of this year would be more normal than 0.625%.

(2) I first raised the possibility of one-and-done in our 10/6 Morning Briefing last year. I based this scenario on the possibility that the dollar might be almighty:

If the dollar continues to strengthen on expectations of a Fed rate hike, it could go to the moon on the first actual hike and threaten to slam the brakes on the economy just as the Fed is finally convinced that it has achieved escape velocity. If so, then that could be ‘one-and-done’ for rate hikes. Conceivably, it could also be ‘none-and-done.’ When the FOMC finally votes to implement its exit strategy from ultra-easy monetary policy, they might find that the door is locked and no one has the key. In this scenario, stock prices could very well melt up.

I’m just thinking outside the box here. Other than last year’s taper tantrum in the financial markets, the Fed has succeeded in exiting QE. The Fed might succeed in normalizing monetary policy starting next year by raising the federal funds rate in a gradual fashion. What’s changed recently for the FOMC, and could complicate the committee’s exit strategy, is the strength in the dollar, which bears watching.

The JP Morgan trade-weighted dollar is up 10% since I wrote that, and up 16% since July 1 of last year. The “dollar” was mentioned nine times in Yellen’s latest press conference. It was mentioned once at her previous press conference on December 17, 2014. The word was mentioned 15 times in the Fed’s February Beige Book of Current Economic Conditions. It was mentioned eight times in the January Beige Book.

(Based on an excerpt from YRI Morning Briefing)