Why The Market Thinks the Fed Is Going to Be “Hawkish”
The No. 1 reason the market has priced more hawkishness into this statement is because it’s expected that the final paragraph in the statement will be altered, and the term “considerable time” will be removed from the following paragraph.
“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.” (Emphasis added).
That’s potentially important because “considerable time” is generally thought to mean six months.
So a translation of the above statement would read:
“…the Committee today reaffirmed its view rates will stay at 0% for six months after the asset purchase program ends and the economic recovery strengthens.”
And, six months from October (when QE is expected to end) is March – not June, which is the current consensus for when rate hikes will commence. So, the bottom line here is there’s a fear the Fed may be telegraphing an earlier-than-expected rate increase.
But, that’s not all we need to watch for.
I’ve been saying for over a month now that the pace of interest rate increases is actually much more important than when the first 25-basis-point increase actually occurs. If the market perceives the Fed as wanting to raise rates faster than current expectations, that will be a massively hawkish event … and a negative on stock prices.
Because of that, the “dots” are important, and tomorrow we get the first look at expectations for where the FOMC members think interest rates will be at the end of 2017.
Bottom line: If we see movement higher in the “dots,” that will be a hawkish surprise—regardless of the language of the statement.
The market has moved pretty solidly ahead of this meeting, to the point where even if “considerable time” is removed from the statement, we might now see much of a reaction (and it’s very much a coin flip if “considerable time” is even taken out).
So, while I do think the trend in interest rates has shifted and is higher, I think there’s a risk of a “sell the rumor/buy the news” reaction unless we see a material shift higher in the “dots.” Unless Yellen is outrageously dovish in the follow-up press conference, any sort of a rally in bonds would be one to sell into, as again I do believe the trend has changed.