Last Words About The FOMC Meeting

As I said before, I still expect the FOMC to remove the reference to “patient” in the statement, not necessarily because they want to raise rates immediately but rather because they want to have the option to raise rates. Removing that term will allow them to raise rates if the data warrant it. So far, the data don’t necessarily warrant it. While the employment situation is improving nicely, wage growth remains tepid. The recent plunge in oil prices suggests inflation might turn down again, and inflation expectations have started falling in anticipation. The Atlanta Fed’s “GDPNow” forecast of Q1 GDP is a mere +0.3% qoq SAAR, although how much of this is due to the bad weather and US port strikes and how much to underlying economic weakness is open to question. Fed funds rate expectations have fallen by up to 17 bps since the last US payroll data. So there is clearly no rush to raise rates. However, it appears that Chair Yellen and her colleagues would like the decision to be dictated by the data, not by their views, and so want to cut themselves free of the “forward guidance” that they themselves put into place in order to convince the market that they were serious about keeping rates low. This view is probably consensus by now, so if they do not remove the line, then USD is likely to fall sharply.

us inflation

Will the statement mention the dollar? The dollar was not a big topic of discussion at the January meeting. It didn’t make it into the statement following the meeting; there was only a vague mention of “international developments,” which might have referred to the Greek elections as much as the dollar. Looking at the minutes, the members though it would be “a persistent source of restraint on U.S. net exports, and a few participants pointed to the risk that the dollar could appreciate further.” However, US exports are only 13% of GDP and net exports 2.8%, which may be significant enough to warrant some discussion but not a determining factor in setting policy. While the huge companies in the S & P 500 make a lot of noise about the dollar, it’s not a big concern for the average pizza parlor or barber shop. Some participants also noted that a stronger dollar would offset the impact of lower real interest rates to some degree. This phenomenon could lead to a slower pace of growth in tightening but would not be likely to veto it entirely.

us exports

Yellen is not likely to say anything about the dollar’s value or “currency wars” The dollar is the concern of the Treasury, not the Fed, and Fed officials rarely if ever comment on it. If she is asked about the “currency wars,” Yellen is likely to dismiss the idea, saying that weaker foreign currencies are simply a spillover from valid monetary policies taken to support domestic demand in other countries. Insofar as these policies help to revive global growth, they are good for the US too. She can hardly say otherwise, given that the Fed ran such a massive QE program for so long.

Look for more volatility FOMC days tend to be more volatile than the average day, and FOMC days with a press conference tend to be more volatile than FOMC days without one. Get ready for some big moves!

Big move in gold The gold prices was falling sharply in the late European afternoon despite the weaker dollar – a bad sign for the precious metal — when all of a sudden it went shooting up on a huge buying order. That may have been related to a headline from Eurogroup Chairman Jeroen Dijsselbloem that “Capital Controls Could Prevent Greek Euro Exit.” The story mentioned the Cyprus bank holiday and capital controls as a template for what can be done to keep a country in the Eurozone. The Greek government was not amused; a spokesman called this a “fantasy scenario” and reprimanded him for overstepping his institutional role. It was notable though that gold quickly lost most of its gains, which suggests that the safe haven bid for gold is just not there anymore.


NZD the big loser as milk prices fall The NZD was the biggest loser against the dollar among the G10 currencies over the last 24 hours after the average price for milk at yesterday’s auction fell to USD 3136.10 from USD 3374.00. Still, milk prices are doing better than iron ore – they’re up 20% so far this year, while Australia’s iron ore export price to China is down 9.1%. The Australian government overnight cut its outlook for iron ore prices from its December forecast due to weak Chinese demand meeting increased supply. This is causing them to trim their budget forecast, which means a slightly tighter fiscal policy. I still prefer NZD to AUD. This could be a good opportunity to short AUD/NZD.

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