E Fed Preview: Little Room For Dovish Talk

The highlight of the coming week is the FOMC rate decision and the US non-farm payrolls release.

At the December meeting, the Fed raised its benchmark rate for just the second time since 2008. Fed also signaled three rate hikes in 2017.

The decision to hike rates in December was uncontroversial… moreover; the financial markets were rock solid (and continue to remain so).

Fed – Faster growth under Trump, but no boom

The minutes of the December meeting released earlier this month showed “officials expect Donald J. Trump’s election to result in somewhat faster economic growth over the next several years, but they see little chance of the boom.”

“Participants emphasized their uncertainty about the timing, size and composition of any future fiscal and other economic policy initiatives as well as about how those policies might affect aggregate demand and supply,” the minutes said.

Any real shift in stance – faster rate hikes/slower rate hikes, would require more clarity on fiscal policy.

Fed on a Wait and Watch mode, little room for dovish talk

• There is little the Fed can do given the fact that the clarity it seeks with respect to fiscal policy is at least a few months away.
• The 5-year forward inflation expectations continue to rise and are currently at the highest level since June 2015. Oil is widely seen testing $60 this year. That should aid further rise in the inflation expectations.
• Also note that the equity markets are no longer afraid of the rising yields. Moreover, markets in general see rising yields as a positive sign.
• So far, Trump has delivered on almost every ‘hard’ promise. Hence, it is logical to assume that a fiscal stimulus is more or less a done deal.

Markets see a combination of protectionism and fiscal stimulus as a net positive for the US economy.

At the most, the Fed could express concerns regarding a strong US dollar. President Trump and Treasury pick Steven Mnuchin attempted killing the US dollar rally, but failed. The fact remains that Trump can’t have it all. The market knows that and thus, Fed’s concerns regarding the strong US dollar could receive a lukewarm response.