Fed is people-dependent and can offer vision, not certainty

Ahead of today’s US Federal Reserve meeting, independent strategist Olivier Desbarres argues that it is the US Federal Reserve’s lack of a unified message which has kept markets on tenterhooks ahead of the policy meeting.

Analysts are split down the middle, he notes – in a recent Bloomberg poll, 37 out of 75 analysts forecast rates on hold, 37 forecast a 25 basis points rate hike and one thought the Fed would innovate with a 12.5bps hike.

“Whilst the Fed is supposedly ‘data-dependent’ it’s unclear what relative weights it attaches to macro data versus financial data and to decent domestic macro data versus global macro data which, bar a few small exceptions, have been weak.” says Desbarres.

“Tomorrow is therefore as much about the 10 voting FOMC (Federal Open Market Committee) members making a decision as to the data they are analysing and interpreting.”

Having analysed recent commentary, it would appear that Fischer and Lacker are clearly in the hawkish camp, Dudley and Evans are in the dovish camp and Lockhart, Powell and Williams are seemingly still sitting on the fence, he continues. Yellen (who has the casting vote), Brainard and Tarullo have not recently commented publicly on US monetary policy or the US economy.

Desbarres acknowledges the subjectivity of such analysis, particularly as out of the ten current voting members, only three have ever voted for a Fed fund rate change and that was a very long time ago. Yellen, when she was San Francisco Fed President, and Lacker voted for a hike in 2006 while Evans voted for rate cuts in 2008.

However, based on the dovish lean of the voting members, Desbarres forecast rates to remain on hold today, which is more closely aligned with market pricing of a 20-25 percent probability of a rate hike.

To the extent that the Fed is data-dependent it cannot offer certainty, because data (and market developments) are uncertain, not to mention open to conflicting interpretations, he argues.

“If the Fed hikes tomorrow, the uncertainty will temporarily fade but will be rekindled as we head towards the Fed’s December 16 meeting. If US and global data and financial markets disappoint in coming months, the market will have to contend with the uncertainty of the Fed contemplating cutting rates,” he comments.

The hawks argue that hiking rates now would give the Fed room to cut rates if/when US growth started to slow again. Desbarres points out that “if hiking rates weakens the US and or global economy, having the room to cut rates once or twice won’t help much, particularly if the Fed’s credibility has been dented in the process.

“Put differently, why take the risk of creating a problem just to give yourself a solution? Cutting the nose to spite the face springs to mind.”