Deutsche Bank- A history of reaction to FOMC-
Where does this leave the market?
Firstly don’t underestimate the mix of new forecasts; new FOMC ‘dots’ and
most important the Q&A, to result in surprises and some volatility.
Janet Yellen probably has no interest in correcting market expectations at this
stage, because a rate hike is still seen by a majority of the Fed as many months,
if not a year away and expectations are not unreasonably out of line with the
Fed’s own views. New geopolitical concerns and the risk of higher oil prices
are adding to uncertainties and further argue against the Fed directing
expectations with any certainty. Yellen is then probably a couple of FOMC
meetings away from being under any real pressure to adjust market
expectations, assuming recent growth and inflation trends persist.
In the meantime, what is less predictable is what happens if the Fed Chair is
asked some difficult questions, notably on the likely gap between tapering and
tightening that led to her infamous ‘6 month’ comment. Another market
sensitive line of questioning, will be on her views about secular stagnation and
the neutral funds rate. Does she believe in a new neutral funds rate? It would
not be a huge surprise to find out that Yellen’s views on this subject are not
too far off the recent Dudley comments that made a case for a slightly lower
natural rate of interest. It is also quite possible that the dots on the longer-run
funds rate will come down to the point where the median is below 4%. The
market will get excited, even if this is merely following the slow drift lower in
the Fed’s central projections on longer-run real GDP that was 2.2% - 2.3% in
March, having come down nearly 0.5% from FOMC estimates 3 years ago.
