Fed's current stance is deeply unsatisfying

Outlook

Today we get new home sales for May (with existing home sales yester day up 4.9% failing to impr ess), plus the April Case-Shiller home prices and June Conference Board consumer confidence. New home sales are forecast up a measly 1.4% after 6.4% the month before (Bloomberg). These are not usually market-movers and we could remain mired in a low-volatility environment. Morgan Stanley’s Stannard said “Volatility is at record lows again and it’s incredible how this is undershooting expectations. During the early part of the recovery process you get a very big positive surprise and we haven’t had that. That’s why volatility hasn’t picked up. The data is still coming in fairly strong and we are going too slowly to see that being reflected in the Fed policy setting.”

Bloomberg reports “Three-month implied volatility in dollar-yen was at 5.83 percent at 6:31 a.m. New York time after declining to 5.715 percent, the lowest level since Bloomberg began compiling the data in December 1995. The dollar was little changed at 101.88 yen, having declined 1.3 percent since March 31. The U.S. currency slid 0.1 percent to $1.3624 per euro. The 18-nation currency was at 138.82 yen from 138.67 yesterday.”

The consensus is for wobbling to continue until something decisive comes out of the Fed… analysts expect the dollar/yen to get to 105-108, but we need a catalyst.

We need a catalyst generally. Maybe we will get a hawkish note or two from Philly Fed Pres Plosser today. The Fed’s current stance—lower for longer and to hell with any contradictory data—is deeply unsatisfying. We may have gotten mixed signals from the BoE—first “rates will rise faster than expected” and then today “but there is too much labor mar-ket slack”—but at least the BoE is talking. The tight-lipped Fed is a lot less satisfactory. It’s particularly annoying that the Fed doesn’t see inflation at the 2% limit as a problem because its preferred measure, the PCE deflator, is still at 1.6%, if probably rising to 1.8% this week. To choose your own definition to get the outcome you want is nit-picking and Jesuitical. People won’t like it ---when they find out. To be fair, the Fed is getting away with it. The public knows some prices are vastly higher—food and energy—but unless and until some authority starts yelling about inflation in the public sphere, the public remains sheep-like and only a few crabby old economists are complaining.

To be fair to the Fed, the economy is still quite weak. The New York Times has a dandy series of graphs showing vari-ous factors over the past five years. None of them indicate a full recovery and one in particular is quite scary—the partic-ipation rate, 66% before the crisis and only 62% now. This is literally millions of persons. The concept of structural un-employment and a giant shift to semi-permanent poverty is made quite clear with these graphics, not that the average Joe reads the NYT, either.

Bottom line, we would prefer the Fed to have the economist’s two hands, like Carney. Failure to disclose downsides alongside upsides doesn’t do anyone any favors. We appreciate the Fed doesn’t want to scare the public or the bond mar-ket, but it has created a never-never land where nobody knows what’s coming next. This is a bad environment for cur-rencies. It lets half-baked and outdated ideas run free, including the old-fashioned idea that the dollar is toast because the Fed cares less about inflation—and is behind the curve—than the Europeans. When the majors are too confusing, the beneficiaries are the emerging market currencies. Positions are too risky in the euro and the yen right now—a currency with some direction is better.