Back
16 Dec 2013
Flash: Scope for more Fed policy guidance limited - RBS
FXstreet.com (Bali) - Scope for more policy guidance by the Fed is limited, according to Greg Gibbs, FX Strategist at RBS.
Key Quotes
"The market is anticipating some steps to try and strengthen the forward guidance on rates. The idea appears to be that the Fed wants to limit the upside impact on rates by making it seem they will delay hiking for longer."
"Ideas floated are lowering the unemployment threshold from 6.5%, introducing a new lower inflation threshold below which rates will not be raised, lowering the rate the Fed currently pays on excess reserves (0.25%), introducing new language to make it seem crossing thresholds will still not lead to hikes for quite a while and those hikes will come slowly, and lowering the FOMC forecasts for hikes and extending them with some members favouring no hike until 2016."
"However, the bottom line is that the credibility of any of these moves is less than the current guidance, and the further the Fed tries to push it, the less the market will believe any of it. That is essentially the essence of the concerns expressed in FOMC minutes. And it is also at the heart of historical comments made by Stanley Fischer who is seen as the likely next vice-chair of the Fed. He said, "You can't expect the Fed to spell out what it's going to do," Mr. Why? Because it doesn't know."
"As such, the market may be too hopeful for additional guidance. The most likely course of action will be new language that hopes to convince the market that crossing thresholds is unlikely to be quickly followed by hikes and hikes will be gradual. The FOMC forecasts may also try to tweak it in this direction."
Key Quotes
"The market is anticipating some steps to try and strengthen the forward guidance on rates. The idea appears to be that the Fed wants to limit the upside impact on rates by making it seem they will delay hiking for longer."
"Ideas floated are lowering the unemployment threshold from 6.5%, introducing a new lower inflation threshold below which rates will not be raised, lowering the rate the Fed currently pays on excess reserves (0.25%), introducing new language to make it seem crossing thresholds will still not lead to hikes for quite a while and those hikes will come slowly, and lowering the FOMC forecasts for hikes and extending them with some members favouring no hike until 2016."
"However, the bottom line is that the credibility of any of these moves is less than the current guidance, and the further the Fed tries to push it, the less the market will believe any of it. That is essentially the essence of the concerns expressed in FOMC minutes. And it is also at the heart of historical comments made by Stanley Fischer who is seen as the likely next vice-chair of the Fed. He said, "You can't expect the Fed to spell out what it's going to do," Mr. Why? Because it doesn't know."
"As such, the market may be too hopeful for additional guidance. The most likely course of action will be new language that hopes to convince the market that crossing thresholds is unlikely to be quickly followed by hikes and hikes will be gradual. The FOMC forecasts may also try to tweak it in this direction."