Yesterday's exuberant equity market reaction has been largely defined by the mainstream media as driven by WSJ Hilsenrath's 'confirmation' that Yellen will keep the uber-dovish phrase "considerable time" in the FOMC statement today. So, we wonder, why did the Fed-whisperer, after markets had closed last night, issue a quasi-retraction of his prediction explaining that instead of some prohetical "I just know" statement, it was a "best guess," as he concluded, "will the Fed take these steps? Only the people in the room know that. The rest of us will see Wednesday afternoon." It appears the sell-side disagrees with him on the language...
In a webcast Tuesday, I explained why I thought the Federal Reserve would stick with, but qualify, an important phrase in its policy statement Wednesday which assures near-zero interest rates for a “considerable time.” This was simply my best analysis of where I think the Fed is going based on what we have been reporting and what officials have said in the past.
Here’s my analysis: Janet Yellen is a methodical individual and the Fed, in normal times, is a slow-moving institution. It takes time for debates to play out. Ms. Yellen is seeking consensus, as we reported earlier this week. The considerable time debate doesn’t feel ripened or fully aired. When Ms. Yellen has used the phrase in recent months she has qualified it, but not suggested changing it. Meantime the Fed has other business on its plate. The exit plan has been in the works for months, as has the plan to end bond buying. Changing the “considerable time” guidance now, while also announcing an exit plan, could be viewed by market participants as a surprising move toward raising rates.
Fed officials haven’t forgotten last year’s “taper tantrum,” when long-term interest rates shot up as they commenced discussions about winding down the bond program.
We reported earlier this week that Ms. Yellen, as Fed chairwoman, hasn’t behaved as the easy-money policy “dove” that many market participants expected. That doesn’t mean she’s suddenly a hawk. It just means she’s not a dove.
Ms. Yellen’s most logical next step, to my mind, would be to stick for the time being to what she’s been saying, which is that rates will stay low for a “considerable time” with the strong qualification that this could change if the job market keeps improving quickly. Staying on message this month could entail signaling an end to the bond program and a more formal exit strategy. The Fed would then have time to air out a change in the “considerable time” formulation for a later date, giving Ms. Yellen time to get all of her colleagues on board.
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He concludes: "Will the Fed take these steps? Only the people in the room know that. The rest of us will see Wednesday afternoon."
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But here is what the sell-side thinks...
Fed expected to adopt more hawkish stance at Sept. 16-17 meeting, debate whether to drop “considerable time” language from statement, based on published research.
- Fed expected to take “modestly hawkish” tone at meeting, Barclays strategists led by Rajiv Setia wrote in report
- “Dovish dots” seen moving higher, press conference will have “subtle shifts” in tone
- Fed likely to retain “considerable time” language; if dropped, “front end should get hurt” and “10/30 curve should still flatten”
- First rate increase now seen as occurring next June vs. Sept. 2015, economist Ethan Harris wrote in note
- Growth has been stronger than expected, while inflation is in line with Fed’s forecast
- Fed could drop reference to “considerable time”
- Fed statement to be “somewhat more hawkish” than in past, economists Ward McCarthy, Thomas Simons wrote in note
- FOMC meeting will fail to clarify ambiguity over timing of rate lift-off
- First rate increase is now expected next June vs 3Q 2015, economist Michael Feroli wrote in note
- Sees 25bps increase in Fed funds corridor to 25bps-50bps; subsequent moves in Sept. and Dec., bringing corridor to 75bps-100bps by end of 2015
- Fed to modify “considerable time,” cut QE by another $10b, strategist Christophe Barraud wrote in note
- Fed’s 2017 dots may prompt curve shifts, strategists led by Matthew Hornbach wrote in note
- “Stage is set for some disappointment” if Fed doesn’t change “considerable time” language
- Fed’s more hawkish outcome may be priced into markets now, economist Neil Dutta wrote in note
- “We cannot be entirely sure” how hawkish FOMC meeting will be
- FOMC may change forward guidance language, CEO Sassan Ghahramani wrote
- Growing number of FOMC members appear to be pressing for change
- FOMC meeting to have “moderately hawkish tone,” economist Thomas Costerg wrote in note
- Fed members will note downward trend in unemployment rate, healthy payroll growth
- “Considerable time” expected to be removed
- Fed to change “considerable time wording, take more hawkish tone, Eric Green, head of U.S. rates and economic research, wrote in note
- Fed policy is set to become more flexible, retain message that there will be slow path to normalization