Yellen boosts dollar despite “considerable period”

by Ashraf Laidi

The final Fed meeting of the year triggered a 40-point rally in the S&P500, posting the biggest percentage gain since October 2013, courtesy of an unexpectedly dovish FOMC statement. Fed chair Yellen sounded more hawkish at her press conference, when she indicated rates could be raised after a couple of meetings, leaving some to conclude that rates could be hiked as early as April. This last phrase fired up the US dollar on all cylinders without diluting any of the explosive rally in stocks.

The dovish surprise of the Fed statement was the maintaining of the “considerable period” phrase, in reference to keeping rates at current levels, while also adding the “Fed can be patient” in reference to “beginning to normalize the stance of monetary policy”.

On inflation

This was the bigger surprise as the Fed made a minor change of wording in recognizing the deepening slowdown in inflation. The FOMC removed the previous phrase expecting “inflation in the near term will likely be held down by lower energy prices and other factors” and the indication that “the likelihood of inflation running persistently below 2 percent has diminished somewhat…”, replacing them by the “…inflation to rise gradually towards 2 percent as the labour market improves further and the transitory effects of lower energy prices and other factors dissipate”.

An additional sentence followed, stating the Fed continues to “monitor inflation developments closely”, which suggests this is now the Fed’s top priority.

On jobs & growth

Mildly upgraded its wording on labour market conditions by removing “somewhat” to describe the improvement and omitting “gradually” with regards to the diminishing of underutilization of labour resources.

Softer on dots

As opposed to the September meeting when the Fed’s published dots forecasts draw tremendous attention, the current forecasts went relatively unnoticed. The Fed lowered its median fed funds forecast for end of 2015 to 1.125% from 1.375% in the September forecast, while keeping its long run view remained unchanged at 3.75%. GDP median central tendency for 2015 also remained unchanged at 2.6%-3.0%, while the unemployment rate view was lowered to 5.2-5.3% from 5.4-5.6. Core price consumer expenditure (Fed’s inflation measure) was lowered to 1-1.6%.

Stocks will no longer defy inflation gravity

Since the Fed neither stepped up its concern with disinflation risks, nor removed the “considerable period” phrase, this suggests that it preferred to await further evidence for the course of oil and the resulting impact on inflation. The Fed’s relatively unfazed stance may have a been a surprise after the November CPI showed the sixth slowdown in seven months and 0.3% decline was the biggest m/m contraction since November 2008. But today’s bounce in oil prices was the first increase in five days and only the third increase in three days, while the Russian ruble finally rose after seven straight declines.

Just as ECB president Draghi preferred to wait until January to deliver the sovereign-bond-attack-on-deflation, Yellen chose to await more evidence before further distancing itself from the tide of most major central banks’ policies. In the meantime, China will continue to export disinflation until stocks are no able to diverge with global inflation and the “catch-down” act accelerates dangerously in Q1. Beware.


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