reports
Subtly Lowering the Bar
MIG sensed a subtle change in July’s FOMC statement. The Committee adopted slightly different language around inflation. They seemed to caveat that measures of core and headline inflation were falling “on a 12-month basisâ€. At the time, we thought they might be indicating a distinction between a tumbling annual rate and potentially more perky monthly changes. If so, it would effectively lower the bar for a December rate hike. That is, so long as the monthly changes were positive, the Fed ...
What Will Drive US Rates From Here?
​ A stellar July jobs report will keep the FOMC on track to normalize policy. A September launch to the Fed’s balance sheet reduction program seems all but certain. Though the prospects for a December rate hike are much less clear. However, the biggest news of the week was not Friday’s jobs number! It was an obscure announcement by Treasury earlier in the week that got much less attention. This will drive the yield curve and LT rates for the next few months. The US Treasury plans to ram...
The Fed's New Conundrum
​The July FOMC proved to be unremarkable as the Fed doubled down on plans to launch its bond runofff program in September. Looking forward, a rate hike in December remains an open question given the divergent views on the Committee around both inflation and the need for further rate hikes.From our perspective, markets may be underestimating the Fed’s determination to raise rates later this year. One source of this resolve is the Fed’s “New Conundrumâ€. That is, the relentless easing o...
Caution: Steeper Yield Curve Ahead
This week was once again marked by sluggish economic data. The FOMC remains watchful, but not worried, about slowing economic momentum. The Fed seems willing to look past recent weak data as long as job creation remains strong and labor markets remain tight. The spat of soft data has caused markets to adjust downward sharply their expectations for the economy and policy. MIG believes there are now compelling reasons to expect the yield curve to steepen over coming months:Growing prospects for up...
FOMC Doubles Down Despite Soft Data
At its June meeting, the FOMC doubled down on its plans to normalize policy despite recent soft data. In our view, there were two key takeaways from this meeting: By lowering their inflation forecast yet leaving the path of policy unchanged, the Fed essentially lowered the bar for a third rate hike and launching a passive bond runoff program in 2017​ The Fed remains highly dependent on the rosy employment picture and tight labor markets as a rationale for its preferred policy path
Fed's Balance Sheet: Mind the Gaps
The Fed is on a trajectory to enter the next phase of normalizing policy as early as this fall. This involves reducing their balance sheet by paring back holdings of Treasuries and MBS. The Fed is deeply immersed in both markets and receding from them could trigger a sharp response in depressed rates and volatility. For their part, markets are quite sanguine about the impact balance sheet reduction may have on interest rates and bond volatility. This is because they have been conditioned over th...
Solid Employment Outweighs Squishy Inflation
Markets have pared back their expectations for further Fed policy action due to sluggish inflation and a slower pace of job growth. Markets may be misreading the recent economic data and the Fed’s resolve. In our view, the FOMC remains on track for rate hikes in June and September and balance sheet reduction this fall. The FOMC will get a chance to weigh in on recent economic developments later this month. In the meantime, it appears markets are reading the economic tea leaves differently that...
The Fed's Balance Sheet: Mind the Gaps
The Fed is on a trajectory to enter the next phase of normalizing policy as early as this fall. This involves reducing their balance sheet by paring back holdings of Treasuries and MBS. The Fed is deeply immersed in both markets and receding from them could trigger a sharp response in depressed rates and volatility. For their part, markets are quite sanguine about the impact balance sheet reduction may have on interest rates and bond volatility. They have been conditioned over the last two year...
Misreading the Fed and Interest Rates
​The FOMC is unusually unified in their message of normalizing policy rates sooner rather than later. This is a clear sign, in our view, of their strong resolve to go forward with plans for two more rate hikes this year and balance sheet reduction next year.Markets, however, remain unconvinced. In the past, it has been wise to bet against the Fed’s resolve. When markets and the Fed disagreed it was the FOMC that would blink first and converge with market expectations. That is no longer the c...
Economy Resilient and Fed Resolute
​This week’s note has two main points: One regarding the Fed, the other regarding rates markets. The Fed remains on track for rate hikes in June and September MIG has been sanguine about the resilience of the US economy and the resolve of the Fed to normalize policy. Economic data and markets are just now catching up. Looking ahead, the FOMC may consider upgrading their forecasts for employment at their June meeting. However, they are not likely to upgrade their outlook for policy just yet...
What Might Derail the Fed's Rate Hike Express?
April’s strong rebound in job growth, affirmed MIG’s view that the Fed is on track to deliver two additional rate hikes this year. What might cause them to change plans? What could derail the Fed’s “Rate Hike Express�1.) There is a near-term risk that inflation continues its decline and moves further below the Fed’s 2% objective. This risk has elevated recently due to sharply falling prices for commodities like oil and iron ore. These disinflationary impulses will likely drag on US ...
Keep Calm and Carry On
The US economy has stumbled since March’s FOMC meeting. Both new job creation and inflation came in notably softer than expected in March. Moreover, US GDP growth was below 1% as well. Yet, the Fed chooses to look past this dip. They view it as a temporary soft patch and view themselves as on track for two more rate hikes this year.Indeed, the Fed has remained more resolute in their quest to normalize policy than markets have. There are several reasons for the Fed’s “keep calm and carry on...
Sluggish US Data Does Not Alter Fed's Plans
​Markets have responded to softer US economic data in recent weeks by reducing the probability of Fed rate hikes. By some measures, markets are now pricing in only one additional policy move in 2017.MIG believes markets are weighing the recent sluggish spring data too heavily and have gone too far in discounting Fed policy action. There are two reasons to support this view: MIG expects the soft trend in data to be temporary and consumer spending and inflation to rebound in coming months Growi...
Are Markets Behind the Curve?
​Unlike prior years, the US economy is largely on track to meet the Fed’s inflation and employment forecasts for 2017. Consequently, the FOMC has clearly signaled their intent to follow through with two more rate increases this year.  Markets, however, continue to discount this - probably because they have heard plenty of unfulfilled promises of rate hikes before.MIG believes markets are “behind the curve†this year and overlooking three compelling factors for the Fed:1.There is a growi...
Revisiting Trumps Impact
Markets have responded to last year’s US election outcome with much optimism and high expectations MIG has been far less sanguine about President Trump’s ability to effect positive changes in the economy. Over recent weeks, markets have reconsidered their view and we do the same here.Overall, there are three main takeaways from MIG’s reassessment of Trump: ·There is little economic upside with proposed Trump tax cuts·Trump’s inclination to constrain the flow of goods and people across...
What Markets Are Overlooking About the Fed
​Markets are quite obsessed with the Fed’s evolving reaction function and their “desire†for future rate hikes. While this is a useful discussion, MIG feels it misses three critical issues: 1.The Fed’s economic outlook is not overly optimistic this year - take their rate forecast seriously​ 2.Markets are overlooking the Fed’s “stealth†tightening tool – balance sheet reduction 3.While rate hikes have impacted the belly of the curve mostly, paring back the Fed’s holdings of...
Take it Easy
While there was little doubt about the outcome of this week’s FOMC meeting, there were still three important takeaways:The Fed gave no indication they feel they are behind the curveSharply easing financial conditions – especially credit spreads – are a growing concern for the CommitteeThere is some tolerance to overshoot their 2% inflation objectiveThe Fed strengthened its consensus around two more rate hikes in 2017 and this is now MIG’s base case as well. However, markets remain uncon...
What Happens Next?
​MIG has updated our forecasts. We now expect core PCE inflation to end the year at 2.1% (vs. 1.8% previously). We still expect two Fed rate increases in 2017 – in March and September - but with an option for a third in June.Going forward, the key question is: Will the FOMC retain their new hawkish stance after the March meeting? Or will they pivot back to more a patient approach? A June rate increase is possible, but hinges on the answer to this question. Over coming weeks we will see how...
Shifting Gears Abruptly, Fed Gains Confidence
​Hard to believe just ten days ago, Atlanta Fed President Lockhart was trying to convince us not to fall asleep on March’s FOMC meeting because it was still a live meeting!Fed communication since December had made clear the FOMC preferred to be patient with rate hikes as long as 1) inflation was sluggish and 2) uncertainty around government policy and the economic outlook remained elevated. So what changed? The Fed’s reaction function became more aggressive. Measures of core inflation have...
Not in a Hurry
​January’s FOMC minutes were supportive of MIG’s view the Fed will remain on hold through June. In fact, the minutes confirmed two important things for us:Elevated uncertainty around Trump policies and their impact on the US economy continues to give the Fed pause​ The FOMC is not trigger-happy and eager to respond to every uptick in inflation. Meanwhile, long term yields have been drifting lower as we antiicpated. This is due to the market re-assessing its view of aggressive fiscal po...
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