On Wednesday, US Fed chief Janet Yellen was presented with yet another
opportunity to prepare financial markets for a September interest rate
hike.
But Yellen sang in the same old dovish tune,
repeatedly emphasising on the fact that market participants should not
worry too much about when the monetary tightening will begin but rather
on the pace or path of these rate hikes. On the latter she said that US
monetary policy will remain highly accommodative and totally data
dependent.
The market got no new information out of the latest
Federal Open Market Committee (FOMC) meeting. This column would label
Yellen as still ultra dovish and expects no rate hike in September.
So when will the Fed hike?
Based
on the FOMC projections or the "dots", 15 out of 17 FOMC members see
the first rate hike in 2015. Further, the dots also show the there is a
possibility of two rate hikes of 25 basis points each this year which
naturally implies that we should prepare for a September lift-off.
However, if that were the case we would not have seen the Dollar Index
getting hammered as the euro, the pound and the Swiss franc all staged
heavy gains against the greenback. Further, US equity markets rallied
and gold too ended the session in the green - all signs that markets
read Yellen's statement and press conference as being super
accommodative. Clearly, much of the market does not see a rate hike
coming in September.
On inflation, US dollar and labour market
Yellen
sounded pretty confident on achieving the US' long-term inflation
target of two percent. She acknowledged that the recent run-up in energy
prices had led to a slight uptick in US core and non-core inflation. On
the labour market front, Yellen labelled the recovery as solid but, in
order not to sound too hawkish, she topped that off by saying that the
labour market recovery could be better still. She wants to see more in
terms of US wage growth.
On the dollar, which has considerably
appreciated over the last one year against a major basket of currencies,
Yellen said that the Fed has no formal policy. This is an interesting
statement as, theoretically, a stronger dollar is doing Yellen's
monetary tightening work for her. Thus, there are many strategists who
believe that the Fed will talk down the dollar in the coming months
ahead.
What's the market impact?
The latest FOMC statement
is bullish for equities, neutral for US bond yields and slightly
bearish for the dollar. The market will soon call Yellen's bluff.
Incoming economic data, although much better than the Eurozone and much
of the developed world, just does not support a rate hike in September.
By December 2017, the Fed projects its short-term interest rate to
remain below three percent, which is much below its long run average
this far out into an economic expansion.
The message is clear:
the Fed will remain highly accommodative. The market should stop
relenting about the timing of the first rate hike: it is inconsequential
whether it comes in September or December. Yellen will take the
"loosest tightening" path in monetary policy history.
(18.06.2015.
Vatsal Srivastava is consulting editor for currencies and commodities
with IANS. The views expressed are personal. He can be reached at
[email protected])
