With the market now predicting virtually zero rate rate hikes for the rest of 2016…
… the Fed will have to take a machete to its next exercise in erroneous groupthink known as the “dot plot”, when it will have to admit it was dead wrong about the state of the US and global economy.
But while until now most Fed speakers have sounded consistently hawkish and steadfast in their views of 4 rate hikes for the rest of the year – with the exception of a more downbeat Vice Chairman Stanley Fischer eariler in the week – moments ago in an interview with Market News, NY Fed president Bill Dudley gave the first official admission of a “Fed relent”, aka policy error, when he made it clear “he and his fellow Fed policymakers will have to discern at their March Federal Open Market Committee meeting whether or not the plunge in stock prices and other adverse market developments cloud prospects for U.S. economic growth, employment and inflation.”
From Market News:
Top Federal Reserve policymakers are leaving little doubt the financial turbulence and souring of the global economy could have significant implications for U.S. monetary policy, but they are loathe to draw too many conclusions about the appropriate path of interest rates at this juncture.
One thing is for certain: The tightening of financial conditions that has taken place since the Fed began raising short-term rates in mid-December is a matter of considerable concern to the Fed, New York Federal Reserve Bank President William Dudley said in an exclusive interview with MNI Tuesday.
But, it was supposed to signal the US economy is “strong enough” to sustain a lift off and decouple from the rest of the world which is scrambling to cut rates. Guess not.
As MNI adds, “a weakening of the global economy accompanied by further appreciation in an already strong dollar could also have “significant consequences” for the U.S. economy, Dudley told MNI.”
Consequences like halting rate hikes altogether? Or outright cutting them? Here are the key quotes from the interview:
“I can give you my own interpretation,” the committee’s vice chairman replied. “I read that as saying we’re acknowledging that things have happened in financial markets and in the flow of the economic data that may be in the process of altering the outlook for growth and the risk to the outlook for growth going forward.”
“But it’s a little soon to draw any firm conclusions from what we’ve seen,” he cautioned.
The punchline: Dudley left no doubt, however, that the deterioration of financial conditions amidst intensified economic uncertainty have registered in the minds of Fed policymakers and that there could be significant policy implications.
“One thing I think we can say with more confidence is that financial conditions are considerably tighter than they were at the time of the December meeting,” he said.
“So if those financial conditions were to remain in place by the time we get to the March meeting, we would have to take that into consideration in terms of that monetary policy decision,” he added.
Kiss decoupling goodbye:
Nonfarm payrolls have shown strong growth, and there have been other indications that domestic economic fundamentals remain sound, despite the Commerce Department’s estimate that growth of the gross domestic product decelerated to 0.7% in the fourth quarter.
But Dudley suggested the U.S. economic outlook could be clouded by storms from overseas.
“There has been a very big change in terms of trade for many countries over the last year or two,” Dudley said. “It’s putting a lot of strain on their economies.”
And, by implication, that of the US as well.
So there you have it. The immediate result: a spike in ES as the market cheers the first strong suggestion by the Fed that it did a mistake and will have to change its entire strategy.
