Another Fed meeting has passed, and once again Federal Reserve officials have talked a good game in terms of raising rates, but have done nothing. I was especially intrigued by yesterday’s question and answer period that followed Yellen’s press conference. The questions were a little more direct and hard hitting than usual. For example, this what happened when the first reporter stepped up to the microphone:
Question: Steve Liesman CNBC. Madam Chair, critics of the Federal Reserve have said that you look for any excuse not to hike and that the goal posts constantly move. And it indeed looks like there are new goal posts now. When you say you are waiting for further evidence and you suggest labour market is being taken up, could you explain what “for the time being” means in terms of timeframe, and what you will look for in order to hike interest rates? Also could you comment to this notion that the goalposts seem to move as it seems like you have introduced a new goal post with this statement.
Chair Yellen Answer: Sod off Steve. You bloody well know how this game is played. We threaten to hike just enough to keep the market on its toes, but at the end of the day, everyone knows there is no way we will ever get out in front of the market. Raising rates in any meaningful way is a pipe dream.
Although the market was not surprised by the Federal Reserve decision to leave rates unchanged, the lowering of the dot plots forecast and the cut to the Fed’s long term GDP growth estimate lathered investors into an orgiastic blue ticket frenzy. Stocks, bonds, gold, everything that wasn’t nailed down exploded higher.
The idea of buying financial assets because the Federal Reserve signaled their ultimate end point for this tightening cycle is lower than previously indicated is laughable. These jokers don’t have any clue what they are going to do next quarter, forget about next year.
But right now it doesn’t matter. The path of least resistance is higher as most investors are underinvested and leaning way too defensively. Talk about the next coming crash still fills the financial news media.
Although I trust the Federal Reserve about as much as gas station sushi, with the election looming in November, they are on hold for the next three months. Combine that with the massive balance sheet expansion from the ECB and the BOE, along with the newly minted BoJ policy tweaks, and you have the recipe for an epic squeeze higher.
It is ironic that this last meeting saw a relatively rare three dissenting votes cast towards higher rates, but the market is interpreting the lowering of long term forecasts as a net bullish development. Those long dated forecasts should have never played a role in investor’s calculus as the Federal Reserve’s forecasting ability is abysmal even in the short run, forget about a couple of years out. But the market is embracing a lower end point for this tightening cycle, and this will mean many asset prices still need to adjust.
The fact the Federal Reserve has finally admitted what the market knew all long, namely that growth is extremely constrained, should give no one optimism inflation will stay muted. Their capitulation might signal the final holdout has given up. I might not know much, but I know the Fed’s forecasts will be wrong. Given the Fed’s new lower estimates, for the first time, I am thinking they might be surprised the other way.
Combining two themes
Lately I have written about my belief that the British Pound offers a great risk reward buying opportunity. And yesterday I discussed the new Japanese monetary programs which are being under appreciated by the market.
Combining those two ideas, I am buying the GBPJPY cross rate.
The chart looks similar to the GBP/EUR and GBP/USD, but it might be even a little bit cleaner.
Thanks for reading,