Yellen's last FOMC meeting has come and gone and Morgan Stanley suggested "where's the snooze button?" in their preview post.
Perhaps the most notable development since the December meeting has been the sharp re-pricing of yields, notably inflation breakevens. The year breakeven is 20 bps higher, and the 5y/5y breakeven is nearly 30 bps higher. As such, an acknowledgement that "market-based measures of inflation compensation have risen" seems likely.
The Fed was hawkish:
- *FED LEAVES RATES UNCHANGED IN UNANIMOUS VOTE
- *FED: ECONOMY TO `WARRANT FURTHER GRADUAL INCREASES' IN RATES
- *FED: INFLATION TO RISE THIS YR, STABILIZE AROUND 2% MEDIUM-TERM
- *FED: MKT-BASED INFLATION COMPENSATION GAUGES ROSE RECENT MONTHS
- *FED: GAINS IN EMPLOYMENT, SPENDING, INVESTMENT HAVE BEEN SOLID
The Fed changed the language of its inflation outlook quite notably with the key language as follows:
"Inflation on a 12‑month basis is expected to move up this year"
... and no longer as it was in December:
"...remain somewhat below 2 percent in the near term"
Even Goldman, in its hawkish version expected this line to remain:
Inflation on a 12‑month basis is expected to remain somewhat below 2 percent in the near term
Additionally, The Fed noted the market's inflation outlook has come their way...
Market-based measures of inflation compensation "have increased in recent months.''
Notably, Wells Fargo's Chris Harvey and Anna Han pointed out that:
"While many market participants don’t expect a major change in Fed policy with the handoff, we think the improving growth environment and anyone not named Janet Yellen [a policy dove] means more hawkishness, at the margin," said
The committee could be slightly more hawkish, or inclined to raise rates, with this year's changes in the voting rotation. The heads of the Cleveland, Richmond, Atlanta and San Francisco Feds rotate on, replacing Chicago, Dallas, Minneapolis and Philadelphia Fed leaders. The Chicago and Minneapolis leaders, Charles Evans and Neel Kashkari, dissented from higher rates in December.
Changes in Fed governors could do the same. Randal Quarles, vice chairman for regulation, joined the committee in October. Nominee Marvin Goodfriend is awaiting confirmation.
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Ahead of today's FOMC statement, the market was pricing in 2.75 rate hikes (of 25bps each)... and a 93% probability of a March rate-hike.
The March rate-hike odds are now at 99.1% after The FOMC.
Since The Fed hiked rates in December, Gold is up 7.6% outperforming The Dow (+6.8%) and The Dollar and Treasury Bond prices have tumbled...
"Mission Accomplished Janet" - Since Yellen took the reins of The Fed - Feb 3rd 2014 - the S&P is up 61%, gold and the dollar are up around 7%, and bonds down 4%...
However, Janet is leaving The Fed with a big problem... Financial Conditions are collapsing easier and easier despite The Fed's tightening...
And so, what to expect for the rest of the day? Tough to say - with no press conference...
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Expected Changes to January FOMC Statement
Information received since the Federal Open Market Committee met in
NovemberDecember indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Averaging through hurricane-related fluctuations, jobJob gains have been solid, and the unemployment rate declined furtherremained low. Household spending has been expanding at a moderate ratestrengthened, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, both overall inflation and inflation for items other than food and energy have declined this year andare running below 2 percent. Market-based measures of inflation compensation have risen recently but remain somewhat low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricane-related disruptions and rebuilding have affected economic activity, employment, and inflation in recent months but have not materially altered the outlook for the national economy. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12‑month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear
roughlybalanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to
raisemaintain the target range for the federal funds rate toat 1-1/4 to 1‑1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
Voting for the FOMC monetary policy action were Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard;
Patrick Harker; Robert S. Kaplan;Loretta J. Mester; Jerome H. Powell; andRandal K. Quarles; and John C. Williams. Voting against the action were Charles L. Evans and Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.
And here is the real thing: let's see how close it comes : Full FOMC Statement Redline below
Considerably more hawkish than Goldman's take.
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And finally, in a humorous nod to her dress-code, The NY Fed's trading room - otherwise known as The (Millennial) Plunge Protection Team -had their own way of bidding Yellen farewell...