skip to main content
Close Icon We use cookies to improve your website experience.  To learn about our use of cookies and how you can manage your cookie settings, please see our Cookie Policy.  By continuing to use the website, you consent to our use of cookies.
Global Search Configuration

We would like to highlight that the shift in tonality seen in the FOMC minutes most probably stems directly from the Fed core (Yellen, Fischer, Dudley, Brainard) who are doves by nature.

Following this, we have already seen some dovish shifts from Fed Kaplan and Evans.

  • Kaplan said that while recent soft data was "likely transitory", he's "not certain of that" and he intends to be patient in assessing upcoming data. He also pointedly refused to answer a question on whether a Jun hike was appropriate.
  • Evans indirectly signalled a preference for a slow tightening path. He said that below target US inflation is "a serious policy outcome miss".
    • He also called out his "conservative" CB counterparts, saying that they focus too much on steepening the tightening path to compensate for projected inflationary pressures stemming from low unemployment.
    • He added that because of this, CBs pursue "overly restrictive conditions" and "deliver lower than optimal inflation".
    • He further made reference to his recent research paper that argued that the Fed doesn't have much room to cut rates before having to delve into unconventional policies such as QE/negative rates in the case of a fresh econ shock, and that this risk means the Fed should tighten extremely slowly this yr and next.

The risk we see ahead is that the other Fed officials will have to somehow align themselves with the Fed core's "prudence" caveat, which means the implied odds of a 3rd hike in 2017 could decline further ahead.

  • According to OIS markets, the probability of further tightening from Nov onwards has fallen by around 5%.

Whilst a Jun hike is still widely expected and market implied odds have actually risen post-minutes to 87.7% (CME), our models have backtested Fed communication over the past few yrs and found something rather interesting. Over the past 2yrs, a dovish shift has not been seen directly preceding the 3 previous hikes.

Not a hard and fast rule of course and there's always a first, but the question we would pose is could the market be in for a shock come Jun with the Fed staying on hold?

At this stage, this is very much the outlier risk although worth noting. JH

Recommended Articles

  • IGM Credit, IGM FX and Rates

    The Context 02.18.20

    18 Feb 2020

    Inside this week’s edition of The Context, Financial Intelligence thought leaders discuss: The JPY Week - Bias is Bearish Has the impact of coronavirus now peaked? We say such talk is premature and an underlying bid Usd/Jpy will continue to slow into 110.00-plus. Euro FIG Snapshot: Virus Protection Fully Operational With the recovery in risk assets extending into a second week, more issuers emerging from blackout and the credit market's virus protection evidently up to date, the pace picked up in the non-covered primary FIG market last week. Equities Ignore, Hope … Euro Indicates Slowing EMU Economy It doesn’t take much to light a fire under equities, but it is going to take much more to push bond yields higher... Read more from The Context and subscribe to have it delivered to your inbox each week!

    Topics Industry News

  • IGM Credit, IGM FX and Rates

    China Insight: Credit Bonds Will Play Catch up on More Supportive Measures

    By Tim Cheung 18 Feb 2020

    The authorities, MOF, PBOC and CBIRC, hosted a joint conference on Feb 7 to provide an update on supportive policies in light of the coronavirus situation. We believe the conference delivered a loosening bias tone as a nimble response to the virus outbreak. Next move following the huge liquidity injection and provision of first batch of special relending funds to more than a dozen of banks is going to be an LPR cut on 20 Feb. We expect a 10bp cut in both 1-year and 5-year LPRs on 20 Feb (chart 1), similar to the magnitude of the latest OMO rate cut. A more sizable cut may mean the policymakers are opting for more aggressive monetary easing to cushion the economic shocks arising from the coronavirus outbreak.      

    Topics Industry News

  • IGM FX and Rates

    China Insight: Credit bonds will play a catch up on more supporting measures

    14 Feb 2020

    China Insight: Credit bonds will play a catch up on more supporting measures

;

Any questions? Speak to a specialist

Would you like to request sample data or analysis from Informa Financial Intelligence? 

See how our tailored solutions can help you gain a competitive advantage: