What now?

So the Fed decision, statement, and commentary were largely as Macro Man expected, given the "shadow statement" presented here a couple of days ago.   Sure, there were some differences- they used "gradual" instead of "cautious", and the bit about monitoring financial markets closely and being prepared to act was left for the press conference.  Overall, however, it's fair to say that the Fed stuck the landing....for a few hours at least.

Macro Man thought that Yellen gave one of her better performances at the press conference.  "Tis true that she'll never be mistaken for Cicero or Churchill, but she generally managed to articulate her explanations in an intelligible way.  She wasn't perfect- more on that below-  but given the questions that she had to work with, she did the best she could.

Ah, the questions.   Never has Macro Man pined for the familiar faces and general competency of the ECB press corps more than he did yesterday.   Let's review some of the questions (paraphrased) that the phalanx of Fedwatchers managed to ask yesterday:

* "You can't hike again until inflation rises, right?"

* "Why have you hiked"?

* "Seriously, have you seen inflation?"

* "Aren't you worried about a recession?"

* "Holy crap, have you seen oil?  How can you hike again when there's no inflation?"

* "So about inflation.   We don't have any, do we?"

* "What would you do if there were a recession?"

* "If everything goes wrong, do you have any tools you use to, y'know, ease policy again?"

* "Boy, banks might have some interest rate risk, right?"

* "What would you tell the average American about today's rate hike?"

That last question was one of the better queries that Yellen received, and her answer- that it shows the Federal Reserve's confidence in the strength of the economy- is what we should have had two years ago rather than the serial moaning that emanated from the Eccles Building and beyond.

A few of the questions that weren't asked include:

* "What does 'gradual' mean for the FOMC?"  (She actually had to volunteer a comment on this since no one was clever enough to ask her.)

*  "What criteria will the FOMC look at to determine when to go again?"  (The journos seemed much more interested in plying her with reasons not to go.)

* "What if any message do you have for financial markets, given that pricing for future rate rises is much more conservative than the dot plot?"

These questions were so obviously in need of a response that it beggars belief that no one asked them.   The continued discrepancy between market pricing and the Fed's projections ("they're not forecasts") is remarkable, given that the FOMC has actually done the unthinkable and hiked.

That market pricing for the end of 2017 is on par with the Fed median for 2016 is a pretty fundamental disconnect, and suggests that somebody- rates punters, equity punters, or the Fed- is in for an unpleasant surprise.

On the inflation front, it will probably be the Fed.   Macro Man had to laugh when Yellen said that she "wasn't aware of a better model" for forecasting inflation....because he wasn't aware of a worse one!  The Fed's inflation forecasting track record is, to put it bluntly, appalling.   If you track the rolling 1 year forward projection for the core PCE deflator with the actual result, you find that they have a correlation of -0.68.   Quite literally, they'd have a tough time being more wrong if they tried!

Part of the reason, of course, is that the models can't see more than six inches beyond their own nose. So it's perhaps unsurprising that markets continue to expect less tightening than the Fed.   That having been said, Yellen shook off every possible opportunity presented by the press corps numpties to state that the Fed's sole or even primary focus is inflation.   By continuing to bring the conversation back to employment, she implied that solid economic growth could well result in more tightening, even without inflation manifesting itself in a broad sense.

How the Fed manages to communicate will be key (gulp.)  Rates markets took the event as very mildly hawkish...but as discussed, there is ample room to reprice further.   Equities put another couple rocks of crack in the pipe and lit up.   The dollar didn't seem to know what to do....it rallied, sold off, and then rallied again...all in modest scale.   EM generally performed quite well....Macro Man would never have though that USD/BRL would be close to unchanged on a day when the Fed hiked, Brazil got downgraded, and the (credible) finance minister was reported to be on his way out.  (Zuma must be feeling slightly aggrieved.)

The Fed has stuck the landing for the time being...but the first routine is always the easiest.   Whether they can continue to do so next year is up for debate.   Not only is it reasonable to have doubts....it's probably unreasonable not to.