“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
-Joseph Tigay
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