US: Financial conditions forcing Fed ‘further’? - Westpac

The use of the word ‘further’ ahead of ‘gradual adjustments’ in the Jan 31 FOMC statement added a bit of weight to the market’s interest in the Fed minutes released this week, according to Robert Rennie, Research Analyst at Westpac.

Key Quotes

“Rather than being a mere ‘flick of the pen’ the minutes suggested a deliberate attempt to ‘update the characterisation of their expectation for the evolution of fed funds’.”

“Also very clear within the statement was reference to the ‘significant easing in financial conditions’ with obvious risk implications for the FOMC rate view. Indeed, our own Fed watcher, Elliot Clark noted that “risks to the FOMC rate view are arguably to the upside”.”

“Now, since the meeting, we have had a reasonable sell off in equities, a modest correction in high yield and a continuation of the rise in treasury yields. So have we seen a material tightening in US financial conditions since the January FOMC meeting took place?”

“Arguably no single financial conditions index can answer this. However, if we take the average of 3 indices (Bloomberg, Westpac and Chicago Fed) we are still well off the highs seen in Feb 2016 and since then the Fed has raised rates 4 times. Thus it seems fair to argue that we have not seen a reversal in financial conditions since Jan – far from it.”

“It seems unlikely that J Powell will use the semi-annual monetary policy report to be published Friday and delivered by J Powell Feb 28/ March 1 to flag fresh policy guidance. The Italian elections on March 4, ECB meeting March 8 and NFP report March 9 all loom as significant risk events on the horizon too. However, the Jan FOMC minutes suggest the Fed wants to see tighter financial conditions and if they are not forthcoming through a higher US$ and or higher US yields etc., then more monetary policy may be required.”

“This is probably just enough to see the US$ build something of a base near term, though double deficits remain a significant weight and it may not be until March 21 that we really understand what ‘further’ means for the Fed, rates and FX markets.”