The big day arrives

The big day that's been on the calendars of Fed-watchers everywhere has finally arrived, and with it a signpost to some of the trends of the last few weeks.   Will the Fed signal "Full Speed Ahead" by articulating a detailed set of exit principles (a necessary prerequisite for ending ZIRP) and perhaps even dropping the "considerable period" language?  Or will it announce "U-turn" by waffling on any concrete timeline for exodus and maintaining the current forward guidance as-is?

For choice, Macro Man would probably lean towards the latter, though a third option "Something for Everyone" could well be the most plausible outcome- announcing a general set of principles (without articulating specifics such as the IOER/RRP  rate spread) while maintaining the "considerable period" language.

Indeed, Macro Man feels relatively confident that "considerable period" will be maintained.   Although there is of course no guarantee that the previous tightening cycle a decade ago will be followed to the letter, it does provide a precedent and a timeline with respect to guidance language that the Fed may well believe can guide markets.

For those of you under the age of 32 or so who have never seen the onset of a Fed tightening cycle, consider the timeline below and possible analogue to the current environment:

June 2003 (September 2014): Fed eases policy   (rate cut in 2003, last announcement with QE in 2014.)

August 2003 (October 2014): "In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period."

September 2003 (December 2014):  "In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period."

October 2003 (January 2015) : "In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period."

December 2003 (March 2015): "However, with inflation quite low and resource use slack, the Committee believes that policy accommodation can be maintained for a considerable period."

January 2014 (April 2015):  "With inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation."

March 2004 (June 2015):  "With inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation."

May 2004 (July 2015): "At this juncture, with inflation low and resource use slack, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured."

June 2004 (September 2015): Rate hike.

The analogue above is far from gospel, and if you wanted to suggest that because of the extraordinary easing put in place over the last six years that the current year should be shifted forward by a few months (leading to a rate hike in, say, June of next year), Macro Man wouldn't argue too vociferously.

The over-arching point, however, is that the Yellen Fed is likely going to walk on eggshells in tightening policy, providing as much gentle early warning as possible.    What better way to do so than repeat the mind-numbing semaphore of the Greenspan era?

Anyhow, as Macro Man sees it, once the "considerable period" gets ditched we're in for two "patients" and a "measured" before the tightening proper commences.    He feels pretty sure that the first hike will come in a quarterly SEP month, which would provide forecast cover as well as give Yellen a chance to explain herself to the public.   Certainly we see a similar dynamic at play with the ECB and BOE, where policy moves often occur during quarterly forecast months.

From Macro Man's perch, this will be the first serious test of the dollar trade of the past few weeks.   Sure, payrolls were poor but the market has had a funny way of ignoring Le Chiffre when it suits.  Insofar as much of the USD trade has been about policy divergence between America and the rest of the world, evidence that the US leg may come a bit later than desired could throw a right cross at George Washington's jaw.  (Suggestions that the ECB is struggling to muster demand for TLTROs won't help, either.)

As for rates, Macro Man bought a few red eurodollars yesterday, as trading the range still seems to make sense- particularly if Yellen sticks to her colours and downplays the imminence of tightening.

As for stocks?  You'd have to think a scenario with a somewhat weaker dollar and lower rates would be taken positively; no doubt that's what yesterday's rally was front-running.  Although Macro Man continues to trim length on strength, he cannot yet bring himself to go short, as neither the price action nor a catalyst suggest it's time.

'Twill come soon enough, no doubt; when it does, much better not to have the burden of a stale, money-losing short to overcome (mentally and financially.)

Bonne chance a tout!