YOU MAKE THE BED YOU LIE IN
We continue to believe that the Fed missed a golden opportunity to start the lift-off process earlier this month. Include us in the camp that thinks the Fed caved to market pressures and delayed the hiking process due to fears over market volatility. They have also tried to tap dance around their assertion that things remain good enough to start the normalization process later this year. The dots plot says as much, which was confirmed by the Chairman herself during her post FOMC press conference. Of course the market will have none of this, as the Fed’s inaction has set off yet another wave of volatility as practically all asset classes, with the exception of sovereign yield and the USD trading lower over the past 2-weeks. Fed speakers have tried to put a brave face to their message that everything is fine and rate hikes are coming for all the right reasons. The message has been that the current low inflation environment will likely be transitory and move towards the 2% target in the next few years. Chairman Yellen spent an hour trying to get that message across last week, and was followed by similar statements calling for 2015 rate hikes from Esther George, William Dudley and John Williams. Only Charles Evans provided a different message, stating his desire to wait until 2016 before starting the lift-off process. Where we stand now is a market that is highly skeptical of the Fed’s willingness to raise rates, as the odds of a rate hike in December stand near a post FOMC low of 40%. Inflation expectations have also generally collapsed, with most breakeven measures falling to post-crisis lows. The market has generally interpreted the Fed in the worst way, with volatility increasing on the prospects of both a rate hike and a delay in the hiking process (damned if you do and damned if you don’t). Data dependence remains the message as does the possibility that every gathering is a live meeting. Having said this, we feel that inflation is the only data point of merit at this point, and market volatility is an unspoken variable to consider. Our best guess remains March, 2016 at the moment, with inflation remaining pernickety and market volatility derigueur as the China problems influence inflation and growth expectations.