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Hostage crisis?

| Posted by: Paul Donovan | Tags: Paul Donovan

  • The Fed decision leaves us looking at having to go through the whole weary process of angst again this year – Yellen signalled a hike before year end, and (though we expect December) October is still a possibility. We look for one US hike this year and four next.
  • Four points from the Fed. First, potentially most troubling, the Fed could be interpreted as being held hostage to the whims of financial markets as a result of today's inaction. It was bad enough when expectations were data dependent. Data and market dependent is not a pretty prospect.
  • Second, it is time to dust off behavioural or political economic models and retire mathematical models. The widening spectrum of views revealed in the infamous "dots" suggests that a naïve hawk versus dove interpretation is inappropriate. This is a multifaceted FOMC dealing with multiple policy options.
  • Third, the Fed put in the market calming caveats that were expected to accompany a rate hike – reassurance on future quantitative policy and the future path of tightening. We got everything except the hike. Fourth, could this be a policy error? Clearly it could, if market volatility is exacerbated by this decision.