THIS ARTICLE IS QUOTED FROM ZEROHEDGE. THE LINK IS AS FOLLOWS:
http://www.zerohedge.com/news/2015-03-15/four-central-banks-meet-fomc-key
-------------------------------------------------------------------------------
Submitted by Marc To Market on 03/15/2015 15:11 -0400
The most important event next week is the FOMC meeting followed by a press conference by Yellen. In order to maximize its room to maneuver, we expect the FOMC statement will drop the patience that has characterized its forward guidance since last December.
This represents an evolution in the Fed's strategy to normalize monetary policy. They have reduced the time of their forward guidance from around six months (considerable period) to two meetings (patience). Yellen more or less executed the strategy that Bernanke outlined for tapering. Shifting away from the date-dependent approach to the data-dependent is under Yellen's leadership.
The Fed's biggest concern with the shift is that the markets will misinterpret this as a sign of an imminent hike. As she did in her Congressional testimony, we expect Yellen to explain that this is not the case. Indeed the next FOMC meeting April 28-29 and there is practically no chance of a hike then. However, the June meeting, which is followed by a press conference, is a different story.
We continue to see June as the most likely time frame for lift-off, but recognize the risk of a short delay, as the Fed did when it began the tapering in December 2013 instead of September as many expected. The data-dependency comes down to largely two considerations. First is the continued improvement in the labor market, broadly understood. Second, is that the FOMC has to be confident that inflation will rise toward 2% in the medium term.
Many participants recognize that the labor market is indeed healing. It is the second condition that seems to be more troubling. Yet this is precisely what the FOMC statement said at the last meeting: "Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate."
If the Fed does not drop the word patience, expectations of a June hike will ease considerably. This would likely spur a dollar correction and a rally in US stocks and bonds. If the Fed drops the word patience but softens this inflation expectation, this would also be a dovish development and weigh on the dollar and lift stocks and bonds.
We advise investors to pay little heed to the dot plots, which seem to be a failed exercise in transparency thus far. We understand that at least some Fed officials are also frustrated with the dot plots but cannot simply be eliminated. We would advise replacing the dot plot with press conferences after every meeting, like the ECB and BOJ. This would also help maximize the Fed's flexibility by preventing gaming Fed actions at meeting in which there is a press conference schedule, as well as improve transparency, and enhance the Fed’s communication.
Yellen has said that the Fed could call a press conference at any time. This is a bit disingenuous. For example, if the Fed does not raise rates in June, and calls for a press conference for its July meeting at which there was not one scheduled, the market would quickly guess what was about to be announced.
Another concern many investors have regards the dollar's strength. Even the longstanding dollar bulls like ourselves, have been surprised the speed of its ascent. Yet this is unlikely to deter the Fed for several reasons:
1. Several Fed officials have recognized that part of the dollar's rise is anticipation of a rate hike.
2. Given the ECB and BOJ's monetary policy, there is a risk that the dollar continues to appreciate. A delay in hiking now may only force the Fed to raise rates later when the dollar is even stronger.
3. Unlike Germany and China that export around 40% of everything they produce, US exports less than 15% of GDP.
4. As Yellen explained in response to a question during her recent testimony, the international variables, which include foreign exchange, oil and world demand, are broadly balanced. The dollar's appreciation has been largely offset, for example, by the decline in oil prices.
Three other major central banks meet next week. In order of likelihood of action, we list them as Norges Bank, the Swiss National Bank, and the Bank of Japan. Norway's macro fundamentals are constructive. Unemployment is around 3%. CPI is up just about 2% year-over-year, and 2.4% when adjusted for taxes and energy is excluding. The mainland economy expanded by 0.5% in Q4 14. These readings would be the envy of most high income countries. Yet signals from the central bank have encouraged the investors to anticipate a 25 bp cut in the deposit rate to 1.0%. The high expectations warn of the greatest risk of disappointment as well.
http://www.zerohedge.com/news/2015-03-15/four-central-banks-meet-fomc-key
-------------------------------------------------------------------------------
Submitted by Marc To Market on 03/15/2015 15:11 -0400
The most important event next week is the FOMC meeting followed by a press conference by Yellen. In order to maximize its room to maneuver, we expect the FOMC statement will drop the patience that has characterized its forward guidance since last December.
This represents an evolution in the Fed's strategy to normalize monetary policy. They have reduced the time of their forward guidance from around six months (considerable period) to two meetings (patience). Yellen more or less executed the strategy that Bernanke outlined for tapering. Shifting away from the date-dependent approach to the data-dependent is under Yellen's leadership.
The Fed's biggest concern with the shift is that the markets will misinterpret this as a sign of an imminent hike. As she did in her Congressional testimony, we expect Yellen to explain that this is not the case. Indeed the next FOMC meeting April 28-29 and there is practically no chance of a hike then. However, the June meeting, which is followed by a press conference, is a different story.
We continue to see June as the most likely time frame for lift-off, but recognize the risk of a short delay, as the Fed did when it began the tapering in December 2013 instead of September as many expected. The data-dependency comes down to largely two considerations. First is the continued improvement in the labor market, broadly understood. Second, is that the FOMC has to be confident that inflation will rise toward 2% in the medium term.
Many participants recognize that the labor market is indeed healing. It is the second condition that seems to be more troubling. Yet this is precisely what the FOMC statement said at the last meeting: "Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate."
If the Fed does not drop the word patience, expectations of a June hike will ease considerably. This would likely spur a dollar correction and a rally in US stocks and bonds. If the Fed drops the word patience but softens this inflation expectation, this would also be a dovish development and weigh on the dollar and lift stocks and bonds.
We advise investors to pay little heed to the dot plots, which seem to be a failed exercise in transparency thus far. We understand that at least some Fed officials are also frustrated with the dot plots but cannot simply be eliminated. We would advise replacing the dot plot with press conferences after every meeting, like the ECB and BOJ. This would also help maximize the Fed's flexibility by preventing gaming Fed actions at meeting in which there is a press conference schedule, as well as improve transparency, and enhance the Fed’s communication.
Yellen has said that the Fed could call a press conference at any time. This is a bit disingenuous. For example, if the Fed does not raise rates in June, and calls for a press conference for its July meeting at which there was not one scheduled, the market would quickly guess what was about to be announced.
Another concern many investors have regards the dollar's strength. Even the longstanding dollar bulls like ourselves, have been surprised the speed of its ascent. Yet this is unlikely to deter the Fed for several reasons:
1. Several Fed officials have recognized that part of the dollar's rise is anticipation of a rate hike.
2. Given the ECB and BOJ's monetary policy, there is a risk that the dollar continues to appreciate. A delay in hiking now may only force the Fed to raise rates later when the dollar is even stronger.
3. Unlike Germany and China that export around 40% of everything they produce, US exports less than 15% of GDP.
4. As Yellen explained in response to a question during her recent testimony, the international variables, which include foreign exchange, oil and world demand, are broadly balanced. The dollar's appreciation has been largely offset, for example, by the decline in oil prices.
Three other major central banks meet next week. In order of likelihood of action, we list them as Norges Bank, the Swiss National Bank, and the Bank of Japan. Norway's macro fundamentals are constructive. Unemployment is around 3%. CPI is up just about 2% year-over-year, and 2.4% when adjusted for taxes and energy is excluding. The mainland economy expanded by 0.5% in Q4 14. These readings would be the envy of most high income countries. Yet signals from the central bank have encouraged the investors to anticipate a 25 bp cut in the deposit rate to 1.0%. The high expectations warn of the greatest risk of disappointment as well.