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Takeaway: We think the hawkish tone from policymakers sets up a potential April policy mistake. Watch out.

From Their Lips: 5 Recent (Head-Scratching) Fed Statements - Fed cartoon 12.21.2015

Are the omnipotent central planners at the Fed losing touch with economic reality?

Hedgeye CEO Keith McCullough offered his thoughts in a Real-Time Alerts note to subscribers earlier this morning:

"... I am officially concerned the Fed makes yet another Policy Mistake (either raising rates in April or signaling they're raising in June in the April statement).

 

The US Dollar has done nothing but go up this week post multiple Fed heads making hawkish statements, and there's obviously a lot of market risk in that (see "reflation" on Down Dollar trades for details!).

 

While the Fed shouldn't be raising rates into a slow-down (remember what happened to markets post the DEC hike), that doesn't mean they won't. One of the biggest markets risks has always been the Fed's forecasts."

In short... post-rate hike stocks tumbled and Long Bonds (TLT) rallied...  

 

From Their Lips: 5 Recent (Head-Scratching) Fed Statements - s p 500 rate hike

With the recent stock market rally and hawkish commentary from the Fed, markets are standing on the precipice of yet another precarious setup.

Here's a brief recap of (head-scratching) Fed president statements this week that (we think) raises the specter of a policy blunder:

  • Chicago Fed head Charles Evans said U.S. economic fundamentals are "really quite good," citing improving manufacturing activity. (3/22)
  • San Francisco Fed head John Williams said the U.S. economy is “looking great” and the Fed would raise rates faster were it not for global factors. “All else equal, assuming everything else is basically the same and the data flow continues the way I hope and expect, then April or June would definitely be potential times to have an increase in interest rates." (3/21)
  • St. Louis Fed head James Bullard said a case could be made for rate hike in April, sounding a hawkish tone. "The odds that we will fall somewhat behind the curve have increased modestly... We are going to get some [inflation] overshooting here in the relatively near term that might cause the committee to have to raise rates more rapidly later on." (3/23)
  • Philadelphia Fed head Patrick Harker said "I think we need to get on with... This economy is really quite resilient to a lot of the headwinds (including the strong dollar).... I am not a two (rate) rise person... I'd rather see [more hikes this year]." (3/22)
  • Atlanta Fed head Dennis Lockhart said U.S. economic growth has "sufficient momentum evidenced by the economic data to justify a further step at one of the coming meetings, possibly as early as the meeting scheduled for end of April." (3/21)

Consider our Macro team's insights from a note sent to subscribers earlier this morning:

 

"Federal Reserve Bank of Chicago President Charles Evans said yesterday that economic fundamentals are “really quite good.” We aren’t sure if he said this immediately after existing home sales was reported being down -7% month-over-month or what he was precisely talking about.

 

People who have no idea what is going on are preparing to do something that they already did that didn’t work…RAISING RATES. What has led the market higher is USD dollar down and reflation, so what happens in April if the Fed raises rates or indicates that they will raise in June?

 

That will be a destabilizer in markets."

Investors can choose to double-down on the Fed's wrongheaded economic projections. But two words of advice .. remember December.