Comment about FOMC Statement today (and for the March meeting)
by Guy Haselmann, Director, Capital Markets Strategy, Scotiabank GBM
Just prior to hiking in June 2004 (the first of many), the May Fed statement warned of a looming rate hike with the sentence, “At this juncture, with inflation low and resource use slack, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured”.
If you see something similar today, then the Fed is likely warning of a hike at one of the next few meetings, while simultaneously expanding its flexibility.
Markets are priced for slightly less than one hike in 2015, while the dot plot calls for 4 hikes this year. Therefore, something will need to give. Market volatility is likely to get exceptionally whippy. This is something already witnessed in Currency Markets.
It appears to me that many roads still lead to a flattening of the Treasury curve. If the Fed appears worried about inflationary expectations the back end will continue to perform. If they use a sentence similar to the one above or give hits of a near-term hike then the front end will move lower (in price).
There are some low risk trades in Fed Funds Futures. Selling some FF contracts outright even have decent risk/reward profiles. Some calendar spreads have cheap ways of taking advantage of the timing of the meetings as well.
Full Statements from March 16, 2004 and May 4, 2004 are below (First Hike of cycle was in June 2004 ) Notice, statements were only around 150 words.
Release Date: March 16, 2004
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 1 percent.
The Committee continues to believe that an accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing important ongoing support to economic activity. The evidence accumulated over the intermeeting period indicates that output is continuing to expand at a solid pace. Although job losses have slowed, new hiring has lagged. Increases in core consumer prices are muted and expected to remain low.
The Committee perceives the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. With inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation.
Release Date: May 4, 2004
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 1 percent.
The Committee continues to believe that an accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing important ongoing support to economic activity. The evidence accumulated over the intermeeting period indicates that output is continuing to expand at a solid rate and hiring appears to have picked up. Although incoming inflation data have moved somewhat higher, long-term inflation expectations appear to have remained well contained.
The Committee perceives the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. Similarly, the risks to the goal of price stability have moved into balance. At this juncture, with inflation low and resource use slack, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.
-Guy
Guy Haselmann | Director, Capital Markets Strategy
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