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Fed Sleight of Hand

“What the eyes see and the ears hear, the mind believes.”  Harry Houdini


Today is the day volatility traders have been eagerly waiting for, that is of course Fed Day!  And it is not just any Fed Day, it is the most important Fed meeting since the last Fed meeting.  That is of course hyperbole, and if there is one thing financial news loves, it’s exactly that.   The Fed is overwhelmingly expected to raise rates, but every time we have the most important Fed meeting since the last Fed meeting, we need to remember the Fed mission.  The Federal Reserve Mission is to promote maximum employment while at the same time keeping prices stable.   In laymen’s terms, high jobs and low inflation.   Those two goals are of course at odds with each other-- as the economy heats up, so will inflation.  So how does the Fed achieve its mission on a day where rates are expected to rise?  They act like a parent who went to Phish concerts in college and tells their children not to do drugs.  Yes, the Fed will say one thing and do another.   Today the Fed will raise rates, but lower expectations for future rate hikes in 2017.  Ahead of the meeting, 2-year Government Bonds are trading sharply lower at 1.31%.

Janet Yellen, for her part, has been committed to inflation, seen as a bigger dove than Greenspan or Bernanke.  However, of the three most recent Fed chairs, inflation has been the lowest under her.  Today’s CPI was very weak, and already is pushing expectations for another rate hike in 2017 lower. 

I think the Fed will raise rates today, but act like doves.  And in two months if the economy picks up, they will hold pat on rates but act like hawks.   It’s a balancing act, and the stock market for its part, approves.

-Joseph Tigay

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