something interesting

<  BACK TO Market Analysis

PIG TODAY-The Fed could be on the verge of making a big mistake

Federal Reserve officials have spoken in such hawkish unity in recent days that financial markets have raced to price in a March interest-rate hike, until recently viewed as a low-probability event.

Wall Street was most swayed by a tone of optimism from the New York Fed president, William Dudley, whose permanent vote on the policy-setting Federal Open Market Committee fuels the perception of greater influence at the table.

"I think the case for monetary-policy tightening has become a lot more compelling," Dudley, a former Goldman Sachs partner,told CNN in a Tuesday interview.

Dudley did not give a specific time for the next move, but his colleagues did. That helped push up market-perceived chances of a March increase up to about 80% from below 40% just last week.

fed funds futures v2

Business Insider/Andy Kiersz

But another trend in the Treasury market is telling: Traders aren't pricing in more rate increases, simply moving forward the timing of the next move. This suggests bond-market investors don't believe the stock market hype about the sudden prospect for a burst of economic growth.

The Fed has raised interest rates just twice in the past decade, having brought them to zero during the depths of the Great Recession, in late 2008. But the loose monetary policy has been well justified by weak economic conditions, including a job market that has taken a long time to return to full health and inflation that remains persistently below the Fed's 2% target. This softness has been reflected in the all to gradual rise in workers' wages, something that compromises the key US economic engine that is consumer spending.

Now that the central bank appears closer to its goals, policymakers are warming up to moving rates up sooner.

Here's why that would be a big mistake.

A mistake

One clear but unspoken reason for the Fed's change of tune, which has shifted market forecasts of a June rate rise to this month, is a seemingly unstoppable stock market, which seems to be underwriting the policy proposals of President Donald Trump. But there are a lot of ifs in Trump's policy agenda and therefore a lot of reasons to be skeptical of the market's recent record-breaking steak of euphoria.

For one thing, Trump's advisers seem much more focused on trade and immigration issues, where Wall Street has its share of qualms with the Trump camp, than the corporate and individual tax cuts that have investors salivating.

At the same time, the Republican Party can't seem to find consensus on its top stated priority, replacing President Barack Obama's healthcare law. If they fail there, political momentum will swing against them, making things like corporate tax reform and any sort of fiscal stimulus difficult to pass through Congress.

The markets also seem to be vastly overstating the potential for a large fiscal stimulus.

The markets also seem to be vastly overstating the potential for a large fiscal stimulus.

Despite talk of $1 trillion in infrastructure spending, critics suspect much of that will come in the form of subsidies to private firms that are punitive to consumers rather than stimulative. In other words, taxpayers could end up paying to build a private toll road that will then turn around and charge them tolls. No extra disposable income there, negating any potential boost to overall economic growth.

Yet here was Dudley's take on matters: "Since the election we've seen very large increases in household and business confidence, we've seen very buoyant financial markets — the stock market is up, credit spreads are narrow. And we have the expectation that fiscal policy will probably move in a more stimulative direction."

How can he be so sure? And is policy action warranted on the mere hint of a possibility? At the same time, the potential for higher rates from an increasingly motivated Fed could create financial instability and would certainly ratchet up the cost of any new federal spending.

The central bank does not appear to be taking that factor into account just yet.

 

Source: businessinsider.com

Federal Reserve officials have spoken in such hawkish unity in recent days that financial markets have raced to price in a March interest-rate hike, until recently viewed as a low-probability event.

Wall Street was most swayed by a tone of optimism from the New York Fed president, William Dudley, whose permanent vote on the policy-setting Federal Open Market Committee fuels the perception of greater influence at the table.

"I think the case for monetary-policy tightening has become a lot more compelling," Dudley, a former Goldman Sachs partner,told CNN in a Tuesday interview.

Dudley did not give a specific time for the next move, but his colleagues did. That helped push up market-perceived chances of a March increase up to about 80% from below 40% just last week.

fed funds futures v2

Business Insider/Andy Kiersz

But another trend in the Treasury market is telling: Traders aren't pricing in more rate increases, simply moving forward the timing of the next move. This suggests bond-market investors don't believe the stock market hype about the sudden prospect for a burst of economic growth.

The Fed has raised interest rates just twice in the past decade, having brought them to zero during the depths of the Great Recession, in late 2008. But the loose monetary policy has been well justified by weak economic conditions, including a job market that has taken a long time to return to full health and inflation that remains persistently below the Fed's 2% target. This softness has been reflected in the all to gradual rise in workers' wages, something that compromises the key US economic engine that is consumer spending.

Now that the central bank appears closer to its goals, policymakers are warming up to moving rates up sooner.

Here's why that would be a big mistake.

A mistake

One clear but unspoken reason for the Fed's change of tune, which has shifted market forecasts of a June rate rise to this month, is a seemingly unstoppable stock market, which seems to be underwriting the policy proposals of President Donald Trump. But there are a lot of ifs in Trump's policy agenda and therefore a lot of reasons to be skeptical of the market's recent record-breaking steak of euphoria.

For one thing, Trump's advisers seem much more focused on trade and immigration issues, where Wall Street has its share of qualms with the Trump camp, than the corporate and individual tax cuts that have investors salivating.

At the same time, the Republican Party can't seem to find consensus on its top stated priority, replacing President Barack Obama's healthcare law. If they fail there, political momentum will swing against them, making things like corporate tax reform and any sort of fiscal stimulus difficult to pass through Congress.

The markets also seem to be vastly overstating the potential for a large fiscal stimulus.

The markets also seem to be vastly overstating the potential for a large fiscal stimulus.

Despite talk of $1 trillion in infrastructure spending, critics suspect much of that will come in the form of subsidies to private firms that are punitive to consumers rather than stimulative. In other words, taxpayers could end up paying to build a private toll road that will then turn around and charge them tolls. No extra disposable income there, negating any potential boost to overall economic growth.

Yet here was Dudley's take on matters: "Since the election we've seen very large increases in household and business confidence, we've seen very buoyant financial markets — the stock market is up, credit spreads are narrow. And we have the expectation that fiscal policy will probably move in a more stimulative direction."

How can he be so sure? And is policy action warranted on the mere hint of a possibility? At the same time, the potential for higher rates from an increasingly motivated Fed could create financial instability and would certainly ratchet up the cost of any new federal spending.

The central bank does not appear to be taking that factor into account just yet.

 

Source: businessinsider.com

lastest Articles

Market Analysis
EUR/GBP flirting with highs near 0.8700, focus on Brexit
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD struggles for direction near 1.1340
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Forex Today: Aussie sees big moves in Asia; Eurozone flash PMIs, ECB minutes – Up next
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
FOMC Minutes Preview: Major Banks expecting a reiteration of a dovish message
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD: Range preserved – Commerzbank
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
BoJ’s Kuroda: Doesn't believe current BoJ policy is weakening the Yen
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Comments from Fed’s Mester show balance sheet decision may come as early as March
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Gold bulls seeking out a run to $1,360/oz while now testing out 10-month highs
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD returns to 1.1300 on mixed German, EMU ZEW
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD eases from 3-day highs above 1.1330
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Gold bulls take a breather just ahead of $1326 level, or multi-month tops
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
ECB to stay on hold in 2019-20 – Rabobank
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Dollar Falls as Trade Optimism and Domestic Uncertainty Take Their Toll
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Oil: Prices are undervalued given the current supply uncertainty - Rabobank
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD rebound from 2019 lows, back around 1.1280
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Gold hits 2-week tops, around $1320 level amid global growth concerns
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD – Euro shrugs off soft German, eurozone GDP
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
GBP/USD falls to 1-month low, 1.2800 mark back on sight
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD is sitting at key support level
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
USD/MXN holds bullish tone, near 19.30
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD recovers above 1.13 as greenback continues to weaken
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
USD: Downside seems limited in 2019 - Westpac
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD depressed and closer to 1.1300
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY - 11.02.2019
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
China stocks climb after holiday break, driven by trade-deal hopes
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Dollar’s next move depends on Trump’s trade progress and border wall funding concession
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
We see risk that EUR/USD could retreat towards 1.12 on a 3 to 6 mth view - Rabobank
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
GBP/USD spikes to fresh session tops, around 1.2970 level
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Daily Results (07.02.2019)
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Gold Technical Analysis: Descending channel/200-hour SMA confluence region to cap goodish intraday bounce
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
GBP/JPY Technical Analysis: Bulls trying to defend descending channel support ahead of BoE
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EU slashes euro-zone growth forecast to 1.3%, Italy only 0.2% - EUR/USD pressured
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Gold slides to $1312 level
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
GBP/USD rallies over 40-pips from 2-week lows, refreshes session tops
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD: Choppy?
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Wekly Results
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Soft Dollar and Strong Stock Market Supported by Dovish Fed and Strong US Economic Data
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY-01.02.2019
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
GBP/USD continues to consolidate
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Daily Results (31.01.2019)
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/JPY drops to 6-day lows near 124.50
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Brexit: Drop the backstop and create a customs association, Ifo economists say
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Daily Results (30.01.2019)
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
AUD/USD: Upbeat inflation pleased Aussie bulls before Fed meets
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/USD Technical Analysis: Upside stalled near the 100-day SMA
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Daily Results (29.01.2019)
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Why the Fed may not announce a change to its balance sheet plan on Wednesday
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
GBP/USD drops to session lows, recovers to 1.3150 as Brexit Plan B debate continues
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY - 29.01.2019
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY 28.01.2019
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Daily Results
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Dollar Falls Ahead of Busy Week in Markets
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Daily Results (23.01.2019)
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
BoC's Poloz: Could see some spillovers’ from US government shutdown
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY - 23.01.2019
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Daily Results (22.01.2019)
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Daily Results (21.01.2019)
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
EUR/JPY continues to move sideways below 125 handle ahead of ECB and BoJ
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY-21.01.2019
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Weekly Results
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Strong US Data, Trade Solace, & Consistent Fed Speak Drive Strong Dollar and Risk Narrative
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Quips of Wisdom
Forex Trading Wisdom: Move the market
https://en.gravatar.com/userimage/34011725/cac48086660b253b9c1e53a8b4a23604.png
Market Analysis
Forex Today: Yen weaker amid US-China trade optimism, UK retail sales – Up next
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Daily Results (17.01.2019)
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Quips of Wisdom
Forex Trading Wisdom: Going Broke
https://en.gravatar.com/userimage/34011725/cac48086660b253b9c1e53a8b4a23604.png
Market Analysis
Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY - 17.01.2019
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Daily Results (16.01.2019)
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Quips of Wisdom
Forex Trading Wisdom: The fool
https://en.gravatar.com/userimage/34011725/cac48086660b253b9c1e53a8b4a23604.png
Market Analysis
UK: On course for a hard Brexit?
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Daily Results (15.01.2019)
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY-16.01.2019
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
British pound volatile as Brexit-vote day arrives
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Quips of Wisdom
Forex Trading Wisdom:- Perfection
https://en.gravatar.com/userimage/34011725/cac48086660b253b9c1e53a8b4a23604.png
PAMM News
Managed Forex Accounts Daily Results (14.01.2019)
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Daily Results (14.01.2019)
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY- 14.01.2019
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Fed’s Dovishness Confirmed – Focus Shifts to Brexit and Earning Season
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Quips of Wisdom
Forex Trading Wisdom: Investing
https://en.gravatar.com/userimage/34011725/cac48086660b253b9c1e53a8b4a23604.png
Market Analysis
USD/JPY - Fed Will Put Over-Valued USD/JPY In The Cross Hairs
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Daily Results (10.01.2019)
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Quips of Wisdom
Forex Trading Wisdom: Do what you love
https://en.gravatar.com/userimage/34011725/cac48086660b253b9c1e53a8b4a23604.png
Market Analysis
FOMC: Caution in mind
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Daily Results (09.01.2019)
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Quips of Wisdom
Forex Trading Wisdom: The goal
https://en.gravatar.com/userimage/34011725/cac48086660b253b9c1e53a8b4a23604.png
Market Analysis
Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY -09.01.2019
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Daily Results (08.01.2019)
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Quips of Wisdom
Forex Trading Wisdom: Opportunities...
https://en.gravatar.com/userimage/34011725/cac48086660b253b9c1e53a8b4a23604.png
Market Analysis
Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY - 08.01.2018
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Daily Results (07.01.2019)
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
Markets Rise After Strong US Jobs Growth with Fed Talking Down Rate Hikes
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Daily Results (03.01.2019)
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Quips of Wisdom
Forex Trading Wisdom: Accepting losses
https://en.gravatar.com/userimage/34011725/cac48086660b253b9c1e53a8b4a23604.png
Market Analysis
Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY-03.01.2019
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Daily Results (02.01.2019)
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Market Analysis
USD/JPY recovers large part of daily drop on improved sentiment, trades near 109.50
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Quips of Wisdom
Forex Trading Wisdom: The Impossible
https://en.gravatar.com/userimage/34011725/cac48086660b253b9c1e53a8b4a23604.png
Market Analysis
Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY - 02.01.2019
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Company News
Happy and Prosperous New Year
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
PAMM News
Managed Forex Accounts Yearly Results - 2018
https://secure.gravatar.com/avatar/b23a9c274f4a28b6ab7acddb98b80613
Quips of Wisdom
Forex Trading Wisdom: Trade What’s Happening…
https://en.gravatar.com/userimage/34011725/cac48086660b253b9c1e53a8b4a23604.png