Still waiting for lift-off

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points.

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. The evidence accumulated over the intermeeting period indicates that output is continuing to expand at a solid pace and labor market conditions have improved.

The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters are roughly equal. With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. 

These were the words that ushered in the last Federal Reserve tightening cycle, at the equivalent meeting in June eleven long years ago.  Despite the fears of the "taper tantrum" and "lift-off fever" over the last couple of years, it's quite clear that nothing like this sort of message will be conveyed in today's FOMC communique.

The real nub of the issue, of course, is whether the committee will signal the possibility of a rate hike in September- or at least their willingness to do so.  It seems almost inconceivable that the language of the statement wouldn't leave the door fairly wide for a hike in September should circumstances warrant;  as such, markets will revert back to the much-discussed dot plot to get a real sense for how likely the committee thinks such a move is.

Recall that at the last SEP in March, the median and mode of the scatter plot was at 0.625%, representing a 50 bp tightening from status quo.    Two committee members sat at unched, while four were above 1%.  Those four will almost certainly be marked lower; regardless of where they think rates should currently be, the fact is that there's only 4 meetings after this one 'til year end, which only leaves time for so many hikes.   Moreover, it's not as if the data has been gangbusters over the last few months, either.

No, the real issue is what happens with the ten committee members who plumped for either 0.625% or 0.875%.  It seems likely that some will move lower, but how many, and by how much?   As has been the case for some time, futures markets are pricing less than is currently "forecast" by the dots; the January '16 Fed funds futures contract implies a FF effective rate of 0.415%.  This is a shade under 30 bps higher than is priced for the month of June, so you'd have to say that there's not a massive amount more that these things can rally while still leaving a healthy chance of a hike this year at all.

For choice, Macro Man would expect a few defections into the bottom tier of the plot, with the bulk of the remainder clustered into the rows consistent with one or two tightenings.

How will markets react?   Hard to say.   The dollar hasn't exactly been running away, despite the ongoing nonsense in Greece.  Indeed, being short euros is a bit like being a fan of the Pittsburgh Pirates these days.   The team has spent the entirety of the time since May 23rd between 6 and 7 games behind the hated St. Louis Cardinals (who, like the Greeks, take a cavalier attitude towards the rules!), despite going 15-5 over that period.  Similarly, it seems like every time Macro Man looks at the euro these days, it's 1.12 and change- other than a brief foray lower right after payrolls.

It certainly trades like people are short euros/long dollars, and even USD/JPY has run out of steam since payrolls.  Once again, therefore, Macro Man cannot help but come to the conclusion that short-term opportunity looks better in fixed income (with the proviso that duration can be impacted by all sorts of non-monetary policy factors such as the game of [headless] chicken going on in Europe.)

As for stocks, on an index level Macro Man remains apathetic and on the sidelines.   In reality, this price action reminds him quite a bit of 2004, when Spooz went nowhere while hand-wringing over Fed tightening.  (Amusingly, Macro Man recalls referring to the 'monetary methadone' of 1% rates back then- he didn't know how good we had it!)   To be sure, European indices offer quite a bit more sizzle in both directions, though even there it feels as if there's still exposure to this Greek rubbish in the near term.   Colour him uninterested.

In the meantime, he looks forward to the day when he can read some text similar to that at the top of this post on the front page of the newspaper rather than the back end of a history textbook.