2017/09/20 Commentary: Fear of Fed   

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Commentary: Wednesday, September 20, 2017

Fear of Fed   

Yep, ‘Fed dread’ is back. And we are not talking about Janet Yellen deciding to go for a fashion change and switch her hairstyle to dreadlocks. Various market tendencies outside of a continual storm reconstruction driven bid in US equities (see Thursday, August 31^st Commentary: When It Rains… and last Thursday’s Commentary: Storm Surge! posts for much more on that) reflect some concerns about the potential for the FOMC to tighten in a way that will weigh on the govvies and also affect foreign exchange. The latter has seen a modest recovery in the US Dollar Index from the violation of it major 2.5 year trading low at 91.91 on the Close two weeks ago. And concern about the FOMC’s next moves is likely behind those two market tendencies.

Yet as explored in our Thursday, July 27^th Commentary: Balance Sheet Chicanery post, the latitude is narrow for the Fed to move in any meaningful way on its two primary fronts: further base rate increases (almost nonexistent at present), and balance sheet reduction that is the primary bogey man worrying the markets right now. While the latter is the more likely to possibly be definitively outlined and then discussed at today’s press conference, on all recent assessments by Fed governors and outside analysts it will be so incremental as to be more psychological than quantitatively critical.

This is also the same as noted in our Commentary: Balance Sheet Chicanery post, and we will be revisiting the reasons behind no likelihood of a rate hike and why the balance sheet reduction is psychological. Yet, let’s give due respect to that psychological component, as the govvies are prone to reacting to future influences as well as current conditions. Consider the major drubbing the US T-notes experienced after both Fed Chair Bernanke’s QE ‘taper’ comments in May 2013, and the hit they took after the last US election even though they managed to rally back in each case (much more below.)

However, prior to delving into all of that, this morning saw the release and presentation of the OECD’s latest Interim Economic Outlook. It seems to confirm that a general global growth cycle is indeed in progress in the short term. Yet it also points out the ways in which the medium term is less assured. The lack of global investment, rising trade barriers, a lack of higher wages typically accompanying a sustained recovery (also important for the Fed), need for further systemic reforms and other key factors might still restrain the recovery. That remains a key focus for the Fed as well.   

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