US Fed Policy March FOMC...Hawkish?

by Michael J. Howell20. March 2014 07:18
March FOMC clearly worried the 5-year fixed income market. It should have hurt stocks more. The statement may not be outright hawkish, but it is the most hawkish in a relative sense for years. The Fed underscored its commitment to play up 'forward guidance' and run down QE with another $10 bn lopped off from April. This suggests to us that they are concerned about financial stability and are beginning to want markets to price in more risk: indeed Chairman Yellen essentially said so much in discussion of risk premia. But the bigger news may prove clarification on the Fed's reaction function, since it now seems clear that 2% inflation is no longer a target but a limit. This is a major change, if correct, since higher than 2% inflation will mean a faster move in rates. We have been warned! It confirms to us that the Fed are joining the PBoC in tightening policy. Not yet bearish, but plainly not bullish. See recent report: The Titans Tighten, March 2014.


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