In a moment of rare honesty, during a conference in England, Fed Vice Chair Stanley Fischer admitted that the Fed is clueless about what happens next, blaming the Fed's lack of clarity on Trump and saying there is significant uncertainty about U.S. fiscal policy under the Trump administration.
"There is quite significant uncertainty about what's actually going to happen, I don’t think anyone quite knows what’s going to come out of the process which involves both the administration and Congress in the deciding of fiscal policy and a variety of other things." Fischer said in response to audience questions about the Fed's next steps. “At the moment we are going strictly according to what we see as our responsibility according to law.”
Traders have echoed Fischer's confusion, with the Trump rally sputtering in on-again, off-again mode in recent weeks, demanding details about Trump's various economic policies. Following the December rate hike, Fed officials have given no indication on the timing of their next hike in response to improvements in the U.S. economy, which however have manifested mostly in the area of "soft" indicators, such as sentiment and confidence surves. In recent days, even these have started to roll over, as the Trump honeymoon slowly ends and the euphoria over the Trump victory - mostly among Republicans as the latest UMichigan consumer sentiment survey showed - begins to fade.
Of course, "confusion" at the Fed is a sobering and welcome change from its traditional stance of being "certain" about the future, if constantly wrong.
Ironically, none other than the Fed's own James Bullard trolled his institution, commenting on the Fed's chronic inability to accurately predict the future and be consistently wrong in its forecasts in a speech on Friday laying out his "2017 Outlook for U.S. Monetary Policy."
Bullard slammed the model behind such projections saying that "in 2016, we at the St. Louis Fed concluded that the model behind this type of projection was questionable"
As a result, the Fed's chronic hubris and monetary policy mistakes, coupled with Trump-inspired fiscal policy confusion, has led to nothing short of total chaos when it comes to economic visibility. As Bloomberg notes, that while some Fed officials have argued March should be on the table for a possible move, recent economic data has not created any sense of urgency in the debate. While employers continued to add jobs at a healthy clip, U.S. unemployment edged up in January to 4.8 percent while wages disappointed, and barely rose despite widespread expectations that minimum wage hikes at the start of the year would boost compensation. Furthermore, while headline inflation has been rising significantly in recent months, excluding rents and energy, core CPI remains stuck in a low range.
Still, since Fischer could not end the panel by admitting the Fed has no idea what to do, he said “we’re very nearly there. There could be a further somewhat strengthening in the labor market -- and to get inflation to 2 percent." The Fed has been saying "we're very nearly there" for years, in the meantime blowing the biggest asset bubble in history.
While some Fed officials said that have begun incorporating into their outlook assumptions about pro-growth policies likely to be proposed by the then-incoming Trump administration, we wonder how they have achieved that as the White House has provided no clear details about what measures it plans it intends to bring to Congress on taxes, spending, regulatory reform or other steps aimed at boosting the economy.
As Bloomberg politely puts it, "that has left Fed officials, and investors, with a heightened degree of uncertainty over the likely path of rates this year and next."
Fischer summarized it by saying “we don’t want to put in very clear expectations when I don’t think they exist in the policy making apparatus yet."
There is some hope of near term clarity: on Valentine's Day Janet Yellen will testify before U.S. lawmakers in Washington where, while expected to keep the Fed’s options open on the timing of the next hike, some have suggested she would come out as Hawkish.
In a note previewing Yellen's testimony, Bank of America said "we had previously signalled that the market was underpricing the risk of a March hike. Our reasoning at the time was based on the view that with market pricing around 25% chance of a rate rise, Yellen may be tempted to try and increase those probabilities to close to 50% and make March live. It is hard to see how Yellen can deliver a message that is more dovish than what the market is already pricing."
Should Yellen surprise to the hawkish side, perhaps stocks will finally noticed as the Yield curve gets one step closer to inverting.
In a separate matter, Fischer was also asked about Trump's deregulation push and the future of Dodd-Frank. He said that he does not think “that the Dodd Frank act as a whole is going to be repealed. There may be some adjustments to it,” he said. “There are many aspects that are extremely important. Significantly reducing the capital requirements would reduce the safety of the system and we certainly hope it’s not going to happen, particularly for the big banks."
In a recent tweet, Bill Gross slammed the push to deregulate banks, saying "bankers want regulation reduced to increase leverage, 8 yrs after too-much-leverage almost sunk the country. Incredible!"
Gross: Bankers want regulation reduced to increase leverage, 8 yrs after too-much-leverage almost sunk the country. Incredible!— Janus Capital (@JanusCapital) February 8, 2017
As reported earlier, Trump’s ability to reshape not only central bank oversight of Wall Street, but the Fed board itself got a major boost on Friday when Fed Governor Daniel Tarullo announced he would step down in early April. Tarullo has been the Fed’s key official on banking and his departure will give the White House an opportunity to fill three of the seven seats on the Fed Board in Washington, where there are already two existing vacancies. In response, Barclays penned a note saying "Tarullo’s resignation only further cements our view that significant change is coming to the Federal Reserve Board of Governors over the next 18 months... we would not be surprised to see five or six new faces on the board by the middle of 2018."
Which, then, goes back to Trump, and what his ultimate intention is vis-a-vis the dollar: to make it stronger, as per his protectionist and border tax rhetoric, or weaker, as suggested by his attacks on countries such as Germany, Japan and China whom he has accused of devaluing their currencies.
For now, however, it is safe to say that nobody has any clue what is going to happen.