IS IT JUST US OR IS RECENT FED COMMENTARY TRULY BIZARRE?
As Hedgeye CEO Keith McCullough points out in this morning's Early Look:
"Following the Fed’s “transparent communication process” can really trip up a Fed follower:
- Two weeks ago, Yellen cuts via taking out the rate hikes = #Dovish
- Then, for all of last week, her Regional Talking Fed Heads talked up “April and June” rate hikes = #Hawkish
- Then she pivots incrementally dovish vs. her teammates’ hawkishness yesterday?"
Here's a look at some recent (i.e. last week!) HAWKISH regional Fed head statements:
- 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)
- 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)
- 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)
- Chicago Fed head Charles Evans said U.S. economic fundamentals are "really quite good," citing improving manufacturing activity. (3/22)
Okay... So how exactly do we reconcile these statements with Janet Yellen yesterday saying "caution" about further rate hikes is "especially warranted"?
The answer might come from the Atlanta Fed's own GDP forecast. The hatchet has been taken to that measure in the past month, cut from 2.7% in February to 0.6% earlier this week.
Here's a key snippet from Yellen's prepared remarks yesterday:
"On balance, overall employment has continued to grow at a solid pace so far this year, in part because domestic household spending has been sufficiently strong to offset the drag coming from abroad. Looking forward however, we have to take into account the potential fallout from recent global economic and financial developments, which have been marked by bouts of turbulence since the turn of the year.
For a time, equity prices were down sharply, oil traded at less than $30 per barrel, and many currencies were depreciating against the dollar. Although prices in these markets have since largely returned to where they stood at the start of the year, in other respects economic and financial conditions remain less favorable than they did back at the time of the December FOMC meeting.
In particular, foreign economic growth now seems likely to be weaker this year than previously expected, and earnings expectations have declined. By themselves, these developments would tend to restrain U.S. economic activity. But those effects have been at least partially offset by downward revisions to market expectations for the federal funds rate that in turn have put downward pressure on longer-term interest rates, including mortgage rates, thereby helping to support spending.
For these reasons, I anticipate that the overall fallout for the U.S. economy from global market developments since the start of the year will most likely be limited, although this assessment is subject to considerable uncertainty."
Yellen also said deflationary pressures on oil prices were "transitory" and the headwind of a stronger dollar would "gradually dissipate."
In other words, Yellen intimates, no worries. But hang on...
- Yellen mentioned the word "risk" 19 times during her speech yesterday
- Uncertainty was referenced 5 times (the title of the speech, "The Outlook, Uncertainty, and Monetary Policy"
- Or how about this acknowledgement of the risks embedded in the Fed's overly-optimistic forecast: "If such downside risks to the outlook were to materialize, they would likely slow U.S. economic activity... For these reasons, the FOMC must watch carefully for signs that the economy may be evolving in unexpected ways."
As we have pointed out before, the phrase "downside risk" is Fedspeak for "I think I probably should lower my forecast, but I'm not sure yet."
Whatever the Fed heads say, our #LowerForLonger (rates) and #SlowerForLonger (growth) calls continue to carry the day.