Scoreboard: Fed theatre

The Fed added to ambiguity in last night’s statement, which was ever so slightly more dovish.

Predictably, we didn’t learn too much from the Federal Reserve statement although I’d note that the 10-year Treasury yield spiked something like 7 bps at 0400 AEST to 2.88 per cent, which is a huge move for no additional information. More to the point, stocks on both sides of the Atlantic ended weaker – the S&P500 closed 0.6 per cent weaker, having been up 0.4 per cent at the high, with all those gains given back following the FOMC statement. The Dow then followed suit and ended 105 points lower (14,897), while the Nasdaq fell 0.4 per cent (3599).

What were people expecting? That they would rule out a taper? Instead, “Almost all participants confirmed that they were broadly comfortable with the characterisation of the contingent outlook for asset purchases … Under that outlook, if economic conditions improved broadly as expected, the Committee would moderate the pace of its securities purchases later this year. And if economic conditions continued to develop broadly as anticipated … the Committee would … conclude the purchase program around the middle of 2014.”

Despite this, I can’t help but think that if you had to characterise the statement as dovish or hawkish, that was ever so slightly more dovish. Certainly the Federal Reserve still suggests a taper is coming, but there was nothing on the timing really, and maybe a little more uncertainty about that. Recent Fed speak has been that anything could happen over the next few meetings, and that still seems to be the case, notwithstanding the view that economic growth in the first half of 2013 was slower than anticipated. But that fact alone means that QE tapering could even be a 2014 thing – and while “a few” wanted a tapering sooner, “a few” still wanted “patience”.

This divergence appears to be based on how confident members were in the outlook. Some obviously less so given that growth was slower in the first half and other indicators for the second half had been ‘mixed’ and the minutes noted that a “number of participants indicated, however, that they were somewhat less confident about a near-term pickup in economic growth than they had been in June”. This is a disingenuous conversation in my view though. It’s not as if we’re talking about policy moving into neutral territory or what have you. We are talking about a very minor change to money printing for an economy that is quite clearly growing at a decent clip and that doesn’t need super-stimulatory policy.

It’s a vacuous debate. Officially though, and in the Fed’s words, “participants were satisfied that investors had come to understand the data-dependent nature of the Committee's thinking about asset purchases”. The fact that they felt the need to emphasise this merely shows how important perception is to the Fed, as few would actually believe this given that QE has never been data-dependent – QE was not a growth measure but a fiscal one. Unfortunately, the Fed finds it is somewhat trapped now, because US Treasuries are probably one of the worst investments in town.

I suspect this is why – at least in part – we are seeing all the theatrics and ambiguity. Communications, expectations management – PR, propaganda, whatever you want to call it – is critical, and the Fed decided to add to the ambiguity by telling the market it discussed lowering the unemployment threshold for hiking rates. If bond yields don’t come down, expect more ‘discussion’ on this issue. They moderated it by noting in the same paragraph that this would lead the public to question the usefulness of those policy targets if they could be moved around. But the thinking public already do, following Vice Fed Chair Janet Yellen’s suggestion that even if the targets were met, rates may not go higher.

Elsewhere, commodities took a hit, with crude down 1.2 per cent ($103.85), copper off 0.75 per cent and gold falling $6.60. Currencies were also whipped around following the FOMC, the Australian dollar dropping half a cent after the minutes and spiking back soon after, only to have the offer back on. The unit currently sits at 0.8973, which is about 30 pips lower than yesterday afternoon. The euro is then 60 pips lower at 1.3354 and the yen is at 97.68, little changed.

Prior to the FOMC minutes we did see some strong home sales data out of the US – existing home sales surged 6.5 per cent in July following a 1.6 per cent fall the month prior. At 5.4 million units, existing home sales are at the second-highest level in six years although on a longer time frame are running just above the average. And that’s all good and well. Not much otherwise.

For today we can expect, according to the SPI, Aussie stocks to fall 0.8 per cent. There isn’t much otherwise, no data to speak of. Tonight we get the European PMIs, while in the US, we get jobless claims and house prices.

Have a great day…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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