Daily Brief – Accommodate that!

Accommodate that!

Last night’s Federal Reserve decision appears to have appeased the bond market, at least for now. In turn, the US Dollar has breathed a sigh of relief and gained a modest bid overnight. This decision may well prove to be a defining element for months if not years to come, so let’s unpack it. Having denied those looking for a 25-basis point hike at the Fed’s last meeting, Warsh’s second decision as chair saw the central bank deliver a hike. You could argue that Friday’s US inflation report denied the central bank of any real choice as to whether or not to act and raise rates.

Nonetheless, in the face of significant resistance from the White House, the decision to raise rates last night gives the Fed a degree of credibility back that it was beginning to lose. The framing of the decision was just as important as the decision to raise rates itself. When discussing the decision, chairman Kevin Warsh described the move as removing a degree of accommodation from monetary policy. That’s likely to be intelligent lip service employed by the chairman but nonetheless creates the impression that the Fed sees policy as at least somewhat accommodative still.

If you still see a degree of accommodation in rates at 4%, that leaves the door open for further adjustment as required. That framing is one major reason why the dollar is stronger and the bond market calmer today. The other reason is the Fed’s updated dot plot. The dot plot is the published series of projections by voting members sharing where they see rates likely to be at key point in the future. Warsh notably abstains from publishing his own dot, but those of the wider committee foresee another hike this year. Last night’s decision shows a Fed more committed to tackling its inflation problem, much to the relief of the Bond market and US dollar, albeit at the expense of equities.

Discussion and Analysis by Charles Porter

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