Given the propensity for market noise, whether the fictitious application of a narrative to suit the particular cognitive dissonance, or simple chitter-chatter, it is always surprising to consider what is not being talking about.
Exhibit A… Stan Fischer’s speech yesterday. Yes, yes, OK so he gave no comments on the short term direction for interest rates, as the many news providers like to summarise it:
But hold on there a moment. Does that mean he said nothing relevant? For a start, he flagged up that he’s “not enthusiastic” about shifting targets given they are “very close” to their inflation and employment targets. He then went on to give a very detailed quantitative analysis of how various factors are depressing the long-term neutral interest rate (Williams’ good old r-star). He goes so far as to include a table, whereby the first 5 factors could reduce the interest rate, and then a couple of suggestions for the last two for pumping it back up again:
He goes on:
“Lower trend increases in productivity and slower labor force growth imply lower overall economic growth in the years ahead. This view is consistent with the most recent Summary of Economic Projections of the FOMC, in which the median value for the rate of growth in real gross domestic product (GDP) in the longer run is just 1-3/4 percent, compared with an average growth rate from 1990 to 2005 of around 3 percent.
We can use simulations of the FRB/US model to infer the consequences of such a slowdown in longer-run GDP growth for the equilibrium federal funds rate. Those simulations suggest that the slowdown to the 1-3/4 percent pace anticipated in the Summary of Economic Projections would eventually trim about 120 basis points from the longer-run equilibrium federal funds rate’
So that means that the current Fed forecasts for 1.75% long run growth means that the long-run interest rate needs to be 120bps lower than you might otherwise expect. That’s 5 chunks of 25bps hikes lower than you might expect.
OK, so you tell me that it doesn’t matter, because a) the market already prices lower interest rates ahead than the Fed; b) that’s a real rate of interest, and if inflation picks up then it does the job for them; and c) in the long run we are all dead so who cares?
Because, my distracted friends, it means that the current ~70% pricing in of a rate hike in December is almost irrelevant. This increased expectation of a hike has been blamed for the 2%+ rally in the USD since the start of the month. Which in turn has been blamed on the receding prospects of a Trump Presidency and therefore the Fed can get on with things. But it doesn’t really matter when they go, because when they start, they’re not going to go very quickly. All of these speeches are designed to neutralise the alleged pain of a rate hike. Don’t get too carried away, that’s the mood music from the Fed. As well they might, because with inflation coming back, and the market starting to sense The End of Monetary Policy, longer term interest rates are starting to spike. Now, we might not believe them, but at some point the market is going to take notice of this mood music.
Which leads to Exhibit B….
The US election mood music. Sure, the likelihood of a Trump Presidency is now just 15% according to venerated pollster Nate Silver. Blondemoney is a fan of anyone who has done well with their predictions, but let’s not forget that Silver himself already admitted he got the Trump candidacy wrong. The Americans keep telling BM that their polls are amazing; they are nothing like their poor UK equivalents. But after the widespread condemnation of those Trump comments about women, do you think maybe at least some people are starting to lie about their votes for him?
All is not as it seems. For once, it’s not about the noise. It’s about what lurks in the silence.