"While we do not expect US yields or the USD to move much on what would be a well-telegraphed balance sheet announcement this week, there is a non-trivial risk of the Fed delaying this process," says James Knightley, Chief International Economist at ING.
Key quotes:
"One of the pre-conditions Chair Yellen had stipulated back in March was the need for solid underlying momentum in the US economy, and recent weather-related disruptions may give officials a reason to hold fire."
"This would indicate the Fed's more pessimistic view of the US economy, and we expect this tail risk scenario to be an outright negative for the US dollar - more so through the signalling channel, rather than any substantial move lower in US yields."
"Rate increases won’t necessarily tighten financial conditions"
"The July FOMC minutes also pointed to two members expressing contrasting views on another major issue: the interpretation of easier financial conditions and what the appropriate policy response should be. Though one member noted that easier financial conditions might warrant tighter monetary policy (the conventional wisdom), another floated the more avant-garde view that elevated risky asset prices were a response to markets adjusting to structurally lower neutral interest rates - a factor which the Fed cannot control."
"This implies that in the absence of inflation, there may be little need for additional Fed rate hikes to tighten financial conditions. We tend to agree, particularly since broader US financial conditions are now clearly becoming less responsive to adjustments in the short-term policy rate. This may well be the same conclusion that Yellen articulates in the press briefing this week, which on its own shouldn't prompt any major re-pricing of Fed policy expectations."
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