Quick Recap
When the Fed tightened rates last December they had a clear bias toward 3 or 4 more tightenings in 2016. But events such as the market turmoil of earlier in the year, concerns about Brexit, and a rogue minuscule 24,000 rise in May's non-farm payrolls kept giving them need to pause in this path of interest rate normalisation.
But now as these concerns have washed away the Fed is signalling it's back on track to hike rates, perhaps as soon as September. It's time the market started listening.
What You Need To Know
It's easy to look at the Fed's actions over the past couple of years and say they'll always find a way to not raise rates.
After the taper tantrum a few years back scared the heck out of traders, and the Fed, the US central bank has been clear in its warnings about the need to normalise rates.
Yet after the best part of two years worth of warnings the FOMC has tightened just once in December 2015.
So it's no wonder that following a mantra of "actions speak louder than words" most traders seem to feel like they'll deal with the rate hike when they see it. Or, perhaps simply that after the next tightening the Fed will go quiet again for many months, perhaps another year.
But that is not the signal that the Fed itself is sending.
After Fed chair Janet Yellen said at Jackson Hole that the case to raise rates had strengthened “in light of the continued solid performance of the labour market and our outlook for economic activity and inflation” traders thought that's not too strong and stocks rallied. Markets initially read Yellen as relatively dovish but a follow conversation between Fed vice-chair Stanley Fischer and CNBC changed all that.
But then Fed vice-chair Stanley Fischer and CNBC changed all that. Reuters reported that “Fischer was asked on CNBC whether people should “be on the edge of our seat” for a rate hike in September, and for more than one policy tightening before year end. He answered: “I think what the Chair said today was consistent with answering yes to both of your questions, but these are not things we know until we see the data.”
It seems so far this week that only Forex traders are taking Fischer and his colleagues like Loretta Mester who told the FT on the sidelines of Jackson Hole that the case for a rate rise was compelling.
The US dollar is stronger as a result even as bonds are fairly quiet with the 2 year note at 0.8% and stocks in a continued torpor.
That US dollar strength came overnight after Fed vice-chair Stanley Fischer was on the hustings again overnight reiterating that the Fed’s moves are going to be data dependant. Crucially though was how he framed what he said in this context. Via Dow Jones Fischer said when it comes to short-term interest rate increases, "we choose the pace based on data coming on," in a Bloomberg television interview. "I don't think we know at the time we start whether it's one and done or several. It depends entirely on what's happening in the economy."
Fischer said when it comes to short-term interest rate increases, "we choose the pace based on data coming on," in a Bloomberg television interview. "I don't think we know at the time we start whether it's one and done or several. It depends entirely on what's happening in the economy."
Read that again...it's hard to get two in this year if they wait till December. The chances of a September rate hike are still underappreciated in my view.
That is particularly the case given that Fischer is saying data is key.
Let me explain.
The Fed expected to hike a few times in 2016 but events intervened. If those events, outlined above, have washed away. And if the jobs, consumption, and wages data have largely tracked as the Fed expected them to - which they have. Then the preconditions that existed in December 2015 for the multiple rate hikes the Fed expected to execute in 2016 are back, fully in place.
That's why John Williams, Dennis Lockhart, Bill Dudely, and others have been warning for weeks that September is a live meeting.
The Fed is being consistent but the market is not giving it credit for this consistency rather penalising them for not wanting to destabilise an already fragile market and global economy earlier this year.
Now some say that if the BoJ and ECB still have the monetary pedal to the floor that means the Fed should wait.
I hold the opposite view. As markets have settled and these central banks keep their monetary pumps primed the Fed is free to concentrate on its own economy and its own market.
That means the chances of a rate hike have risen materially.
So a strong non-farms on Friday night with wages growth and hours worked similarly strong will make the case for a September hike.
The time for pause has passed. The Fed has been right on jobs, consumption and wages. They are likely to soon act.
But don't listen to me listen to Stanley Fischer. The picture for this post is of the three senior Fed officials Yellen, Fischer and Dudley at Jackson Hole. It's a staged picture from staged video. But it was done for a reason
The Wall Street Journal reported overnight:
"Mr. Fischer was also asked to comment on his appearance with Ms. Yellen and the New York Fed leader William Dudley right after the chairwoman's speech showing the three walking together to take in the Jackson Hole scenery. "It sent a message that people within the system are thinking along similar lines," Mr. Fischer said."
The Fed wants to raise rates. Traders had best heed the warning they have been given.
Have a great day's trading
Greg McKenna
Chief Market Strategist AxiTrader