Why This Time Is Different: "Fed Guidance Really Matters"

From Bloomberg macro commentator Marc Cudmore

Today’s Fed meeting is critical for all financial assets. A large part of the framework for how to trade the year ahead will be clarified between Wednesday’s statement, the dot plot and subsequent FOMC member speeches in coming days.

Fed meetings are often overhyped, particularly by financial commentators. Don’t dismiss the hype this time. And because the Fed’s decision is so crucial for the path of FX and rates, every other asset hinges on the outcome by extension.

It’s not that Fed guidance has never mattered before, but it’s vital now that we have moved beyond the data dependence that was the key theme for the last few years.

Previously, those traders who believed in higher yields bought into the idea of inflation accelerating, whereas those who were most bullish Treasuries feared for the strength of the economy.

Investors are still as divided as ever on the path of U.S. rates and the dollar, but the arguments have radically shifted. There’s a broad consensus that the economy is solid but that inflation isn’t at risk of surging any time soon. The data trends have been remarkably clear, so who cares too much about the marginal releases?

What people do care deeply about now is the reaction function of the FOMC. Will the committee ignore the lack of inflation and press on with policy normalization for as long as easy financial conditions suggest the economy can cope? Or, given its official mandate, will the fact that core personal consumption expenditure growth has been in a clear and sharp downtrend all year mean that it immediately ends the hiking cycle?

A December rate rise is approximately 50% priced going into the meeting. Such a binary setup, in the context of crystal clear data trends, shows how it’s now all about the reaction function for traders.

The Fed’s statement and press conference will clarify that reaction function. Speakers may refine the message in the coming days but, if the committee is to maintain credibility, it can not reverse completely from the course it’s about to set. The underlying asset-price directions prompted today are likely to sustain well into 2018.

Comments

HalinCA Wed, 09/20/2017 - 05:52 Permalink

So much shit: It’s not that Fed guidance has never mattered before, but it’s vital now that we have moved beyond the data dependence that was the key theme for the last few years.

thunderchief HalinCA Wed, 09/20/2017 - 06:58 Permalink

My guess is Janet Yellon will leave when her term is up, regardless if The Donald begs her to stay.She will go down as the last Fed Chairman who was hawkish the whole way through.   Ben Bernanke set her up by starting the Taper his last months in office, which she carried through until ending the last Overt QE program, QE III.  She has since been singing interest rate hikes, as little and far and few as they've been.Now she starts her grand exit from the Fed, the next Fed Chairman  being a financial crisis hatchet man and clean up crew.She now does her Fed Hawk swan song, the selling off of the fed ballance sheet, before she rides into the sunset, completely un-blaimable for the greatest disaster in western financial history.   The Neo keynesian experiment.       experiment.

In reply to by HalinCA

HalinCA thunderchief Wed, 09/20/2017 - 08:10 Permalink

... "moving beyond data dependency" ... isn't that a clever way to say 'we have totally lost control over the money supply and the economy due to shadow banking and a host of other factors, so we will wing it and lie like politicians to try to keep you all bamboozled'?I really don't know why a person who presided over the huge QE projects and procrastination of interest rate raises until she knew HRC was not going to be blamed can be considered hawkish. By today's standards, what would Paul Volker be considered?  A Dragon-hawk?And I really don't think the next Fed team will do anything different.  How can they when 'return to pre-2008 normalicy would trash the entire pension industry?   

In reply to by thunderchief

new game HalinCA Wed, 09/20/2017 - 07:07 Permalink

Fed speak plain talk: We shift the policy to accomadate the wealthy .01 percent of the club, and since you aint in it - you be fuked. we hope some trickle down gets your way. we are sorry to you savers(real, sorta, wealth created from  labor)sitting with fiat reserve notes,as you have been fuked by zirp and nirp. so we will maintain the policies for above mentioned reasons and say other gobblety gook and try to keep fooling the economically challenged super majority, including prez trump. we are the supreme ruling class putting on this fedspeak shitshow to impress upon you, the plebs, that our ivy league degrees mean something.thanks and go work your asses off for some fiat chicken scratch...SSM

In reply to by HalinCA

gatorengineer Wed, 09/20/2017 - 05:57 Permalink

The economy is solid, this guy is funnier than Colbert.....   I am a Project Manager in the Oil and Gas, and Power industries, and recently had to take a 33% pay cut to get a job..... This was a "good" job, as the others out there were for a 50% plus cut.  But at least I am home every night now..... Let me ask a question, does anyone on here work in an industry that looks or feels solid? 

buzzsaw99 Wed, 09/20/2017 - 06:05 Permalink

laughable commentary.  everybody has the fed's number except bloomturd apparently.  nobody is afraid, ain't nobody selling jack shit.  too bad, so sad.

lester1 Wed, 09/20/2017 - 06:13 Permalink

The Fed is literally manipulating all markets. They are unaudited and there is nothing to stop them from doing this in the name of "price stability."

yogibear lester1 Wed, 09/20/2017 - 08:21 Permalink

Indeed, their busy in the bond market and stock markets purchasing debt and stocks to prop everything up.When China or Russia dumps treasuries their in there quietly buying, otherwise rates would rise and blow up the bond market. Their enemy is price discovery and their in every corner with their infinite fiat propping areas up.Spinning plates.Consumer debt saturation  stalls retail so they'll have buy some more  bad debt with their digital fiat.

In reply to by lester1

Kefeer Wed, 09/20/2017 - 06:19 Permalink

A quarter percent is not a rate hike and what happened to the 3-4 hikes?  Data dependent???? What non-sense is that?!...so God gave them over to non-functioning minds to do those things which are evil............

Last of the Mi… Wed, 09/20/2017 - 06:21 Permalink

In my position for 35 years if you had a degree here you had a job. Not any more, big corporations getting into the college process along with government contracts have decimated profits and schools cranking out grads with $175,000 debt each makes employment dicey at best. For me, I remember when times were good and the money flowed freely within our segment of the economy but the new guys coming out now have starry eyes for nothing but larger government control, not only of our industry but every industry. They are completely clueless about any sort of free market, competition, and the small business owner's problems with government regulation. They embrace any sort of regulation as the intelligent solution each and every time and openly deride some of us older guys as "the conspiracy crowd" when we even consider using common sense of government intervention. They are completely indoctrinated and happy as a pig in shit to fill out yet one more government form, one more government questionnaire, and submit to one more government employee walking unannounced into your business and dressing you down about how it is run. The latter happened less than a week ago and when the government stooge was questioned about the intent of the regulation he/she was trying to enforce refused or could not answer and referred the employee back to the massive swarm of undecipherable government regulations. That is one thing I have noticed more and more lately. If you ask a government employee what they mean and what they want you to do, all you get is a cut and pasted paragraph of law with absolutely no explanation (and of course no responsibility) as to what the true intent was/is. It is just pitiful.

johnlocke445 Wed, 09/20/2017 - 06:28 Permalink

So inflation is virtually nonexistent? Where are you buying your food and household goods? Where are you buying your health and car insurance? What about electric and gas payments? STOP LISTENING TO WHAT YOUR GOVERNMENT IS TELLING YOU!

brushhog johnlocke445 Wed, 09/20/2017 - 07:25 Permalink

I stopped buying food years ago when I discovered that it grows for free right out of the ground. Soap is also very easy to make. Health insurance? My healthcare costs dropped enormously when I dumped insurance altogether. I pay out of pocket now....so far this year my healthcare costs have been $200 for an office visit.Car insurance? Yes that has gone up. I used to pay $800 for the year now I pay $875. Electric hasnt changed, and gas has gone down. You know for every action there is a reaction. You have options.

In reply to by johnlocke445

buzzsaw99 Wed, 09/20/2017 - 06:32 Permalink

if the stock market goes down in response to what yellen says some other fed asshole will come out fifteen minutes later with a statement which says, no, that's really not what she meant.  so how exactly is fed guidance good for anything?