US Fed Speakers Follow FOMC Taper with Interest Rate Guidance
- Yellen signaled to the market that rate hikes may come sooner than expected on Wednesday
- In a dense round of Fed speakers this past Friday, the hawkish outlook was reinforced
- A substantial concern over financial stability was made on abnormally low risk premiums
A round of Federal Reserve officials were on the newswires Friday, just two days after the FOMC meeting. The Dow Jones FXCM Dollar Index (ticker = USDollar) posted its largest rally in six months after Fed Chairwoman Yellen signaledthat rate increases could come sooner than markets had previously anticipated. In addition to the third consecutive Taper – a $10 billion reduction that brings monthly purchases to $55 billion per month and reinforces expectations that this is the status quo – growth and inflation forecasts were held steady while median yield forecasts were upgraded. Of particular note Yellen remarked that rates could be held for a “considerable time” after the QE3 program was wound down. She went on to comment that “considerable” could reasonably be associated to a six-month time frame. The prospect of a definable time frame for a 1Q or 2Q 2015 rate hike did not sit well with the markets.
Looking to clarify the official statement, a cadre of Fed members spoke Friday. Two notably hawkish remarks were made from the commentary. In the first Dallas Fed President Fisher suggested QE3 would end by October at the current pace and St. Louis Fed President Bullard insinuated the six-month time frame was reasonable – reaffirming the market’s dollar positive / risk negative interpretation from Wednesday. The other noteworthy concern was related to financial risks. Fed Governor Stein went so far as to suggest abnormally low risks premiums called for tighter monetary policy, and presented financial risk at current levels.
Here are some of the highlights from the Fed officials’ comments Friday:
Dallas Fed’s Fisher - Hawkish
- Reiterated his opinion that the Fed has “exhausted the efficacy” of their asset-purchasing program.
- Expects the QE3 program to be wound down by October at current pace
- Fisher was also notably critical of the Fed’s current policy of setting forward guidance, an approach intended to give markets more certainty over future interest rate decisions.
Fed Governor Jeremy Stein - Hawkish
- Say abnormally low risk premiums call for tighter monetary policy; has the potential to raise the risk of a financial crisis.
- Called for Fed to use tighter monetary policy to increase financial stability, rather than focus only on inflation and unemployment.
St. Louis Fed Bullard - Neutral
- Yellen’s connection of ‘considerable’ time to a 6-month horizon, is in-line with private surveys
- Affirms positive outlook for economy in 2014 and worried about low inflation
- Remarks Fed is not “preoccupied” with curbing risk taking
San Francisco Fed John Williams - Neutral
- Downgrades his GDP growth outlook for 2014 to 2.5% from 3%, citing weaker data
- Policy “needs to remain high accommodative” to spur growth and achieve 2% inflation target
- Expects main rate increase to come around mid-2015.
- Calls for need to modify forward guidance, favoring more qualitative measures
Minneapolis Fed’s Kocherlakota - Dovish
- Single dissenter to the March 19 FOMC decision,
- Raising rates to head off a potential financial crisis offers “little benefit”
- Concerns that FOMC guidance is fostering policy uncertainty and weakening the credibility of a 2% inflation target.
- Urges a clearer quantitatively measured 5.5 percent unemployment rate threshold and a 2.25 percent inflation target in place of 6.5 and 2.0 percent respectively.
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Dow Jones FXCM Dollar Index (15min chart) – March 21, 2014
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