Why This Time Is Different: “Fed Guidance Really Matters”

    From Bloomberg macro commentator Marc Cudmore

    Today’s Fed meeting is critical for all financial assets. A large part of the framework for how to trade the year ahead will be clarified between Wednesday’s statement, the dot plot and subsequent FOMC member speeches in coming days.

    Fed meetings are often overhyped, particularly by financial commentators. Don’t dismiss the hype this time. And because the Fed’s decision is so crucial for the path of FX and rates, every other asset hinges on the outcome by extension.

    It’s not that Fed guidance has never mattered before, but it’s vital now that we have moved beyond the data dependence that was the key theme for the last few years.

    Previously, those traders who believed in higher yields bought into the idea of inflation accelerating, whereas those who were most bullish Treasuries feared for the strength of the economy.

    Investors are still as divided as ever on the path of U.S. rates and the dollar, but the arguments have radically shifted. There’s a broad consensus that the economy is solid but that inflation isn’t at risk of surging any time soon. The data trends have been remarkably clear, so who cares too much about the marginal releases?

    What people do care deeply about now is the reaction function of the FOMC. Will the committee ignore the lack of inflation and press on with policy normalization for as long as easy financial conditions suggest the economy can cope? Or, given its official mandate, will the fact that core personal consumption expenditure growth has been in a clear and sharp downtrend all year mean that it immediately ends the hiking cycle?

    A December rate rise is approximately 50% priced going into the meeting. Such a binary setup, in the context of crystal clear data trends, shows how it’s now all about the reaction function for traders.

    The Fed’s statement and press conference will clarify that reaction function. Speakers may refine the message in the coming days but, if the committee is to maintain credibility, it can not reverse completely from the course it’s about to set. The underlying asset-price directions prompted today are likely to sustain well into 2018.



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