Rate hike clues to be found through the Fed’s silence

17th June 2014

Fed Monetary Policy Meeting and Press Conference – 18/06/14

Since the tapering hysteria that preoccupied markets through much of last year, the Fed has been stringent in keeping communication consistent. The June meeting is likely to see asset purchases lowered by a further $10 billion, alongside a word for word reissuing of its last monetary policy statement.

Chairman Yellen has remained tight-lipped since she inadvertently put a six-month timeframe on when interest rates would rise after tapering ended and she will be even less forthcoming in her post-meeting press conference. Despite the reticence, any comments on the housing market will be keenly watched. There has been a small rebound in housing market activity into the second quarter but this is unlikely to be enough to change Yellen’s view that the housing sector is the one domestic risk to growth.

With little information to be found elsewhere, it’s likely that the market will once again focus on the dot chart, which gained so much attention at the March meeting. The chart illustrates Fed members’ projections for the interest rate, and although officials downplayed its importance, it will be critical as we enter a tightening cycle.

The March meeting minutes showed a subtle shift in discussion at the Federal Reserve, focusing on the practicalities of raising the Fed Funds Rate. The Fed’s James Bullard has already suggested that, based on low unemployment, he will revise forward his projection for the first rate hike and Esther George joined in on his call, citing inflation as the key factor. Concern over the eerily low levels of market volatility has now added yet another reason for sooner rate rises.

Two Fed members have already expressed concern about financial market complacency in a market environment reminiscent of pre-2007 days. Bringing forward the projection of rate rises will be one way to remind markets that higher interest rates are coming and that future policy might not be so accommodating to risk assets.

The Fed policy meeting and press conference will provide little new, but a subtle shift forward on the dot chart will remind markets that the liquidity party won’t last forever.