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How Much Influence Does the Fed Have Over Market's Dollar, SPX View?

How Much Influence Does the Fed Have Over Market's Dollar, SPX View?

2017-04-06 02:58:00
John Kicklighter, Chief Currency Strategist

Talking Points:

  • Central banks have a bias as cheerleaders for their economies and markets, with further interest to squash volatility
  • The FOMC minutes maintained its uniquely hawkish outlook relative to other central banks, but markets have acclimated
  • Markets are skeptical of central banks' views of value for currency and markets, but the Fed's weigh in still surprised

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Monetary policy events have lost a lot of their market-moving influence over the past months and years. For the FOMC's release of its meeting minutes for a previous rate decision, interest has all but disappeared. And yet, with the release of the detailed transcript of what was discussed at the March 15th decision, there was a jolt of volatility. Given the significance of the policy decision that it served to expand upon, it is understandable that the market was more tuned into the update. This past month, the Fed hiked rates to shorten the gap between tightening from 12 to 3 months. There is now even greater interest in pace. And yet, despite the fundamental leverage, the market's response was measured. What should we expect central banks' influence over the currency and capital markets to be going forward? How can this influence change?

Though there are tentative changes in the course of monetary policy - particularly from the Fed - the world is still locked to a dovish extreme. Having hit record low rates and inflated massive stimulus programs, the market focus has shifted to distant hopes of slow change rather than meaningful alterations to returns. Furthermore, given their uniform position at the extreme dovish end of the scale, individual policy efforts are defacto competitive. Actual policy efforts at these depths are therefore going to struggle to leverage a response from the market. For 'jawboning' or in-house assessment of exchange rate / asset value, the market response is even more ephemeral. From the Fed, there is arguably greater contrast, but the difference is still marginal in the grand scheme. Add to that the effort by the central bank to be as transparent as possible, and it should come as little surprise that the similarities are stronger than the differences.

Ultimately, central banks find their greatest influence in the markets through action - that is rate hikes/cuts or stimulus expansion/contraction. Anything else caters to speculators' appetites. There are a few issues on this front. Anything that does not explicitly lead to an acceleration of the easing pace or reversing course is too subtle in this world of transparency and is summarily ignored. Reference to these groups' views that market value is off the market is even further from their capable impact. Traders put even less value in a central bank's fair value of an equity index or exchange rate than a questionable commitment to future policy changes. The RBA and RBNZ have long struggled with the FX component. For the Fed, they wouldn't weigh in on the Dollar; but there was reference to the state of the equity market. 'Some' of the group stated that equities were expensive. Yet, Chair Yellen's remarks about social media and biotechs being 'frothy' still rings in traders' ears - and both sectors have gained alongside the market since this evaluation was tendered. We discuss the bluster and limits of policy evaluations in today's Strategy Video.

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How Much Influence Does the Fed Have Over Market's Dollar, SPX View?

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