Back
16 Sep 2015
Fed communication to take centre stage in case of hike – Deutsche Bank
FXStreet (Delhi) – Research Team at Deutsche Bank, note that in case the US Fed raise rates, then due to the change in rate regime there will be a change in communication policy which will be even more significant.
Key Quotes
“The Fed has, over the last few years, been at pains to inform the market of its intentions well in advance. Coming into this FOMC, Fed speakers have been backtracking from a rate hike, which is only 30% (or less) priced by Fed Funds and also now by less than 50% of economists.”
“A hike would, therefore, be a surprise. This would therefore undermine the credibility of a "dovish hike". Why should the market believe an FOMC that has backed away from a Sep tightening, if their action is then to tighten and thus signal a change in communication style that has been a pillar of their policy for so long?”
“The market would price in some measure of another hike into Dec and then again into Q1 with a resounding "we don't believe you" to any plea for dovish clemency. Further, I take umbrage at the concept of a "dovish tightening". The Fed is hiking in order to tighten. They should expect a reaction function accordingly. Why would they tighten and not expect the market to react as such? If the response to a tightening is a dovish outcome, I would argue that they have singularly failed.”
Key Quotes
“The Fed has, over the last few years, been at pains to inform the market of its intentions well in advance. Coming into this FOMC, Fed speakers have been backtracking from a rate hike, which is only 30% (or less) priced by Fed Funds and also now by less than 50% of economists.”
“A hike would, therefore, be a surprise. This would therefore undermine the credibility of a "dovish hike". Why should the market believe an FOMC that has backed away from a Sep tightening, if their action is then to tighten and thus signal a change in communication style that has been a pillar of their policy for so long?”
“The market would price in some measure of another hike into Dec and then again into Q1 with a resounding "we don't believe you" to any plea for dovish clemency. Further, I take umbrage at the concept of a "dovish tightening". The Fed is hiking in order to tighten. They should expect a reaction function accordingly. Why would they tighten and not expect the market to react as such? If the response to a tightening is a dovish outcome, I would argue that they have singularly failed.”