Markets, Fed Policy and Managing Expectations
One would think the Fed officials would like to get out of the spotlight and just read the data, meet every two months, decide to raise or not raise rates, explain why and return to their cozy offices.
That’s how the Fed used to operate. There was no mid-Federal Open Market Committee (FOMC) meeting state of affairs, or a litany of February governor speeches at every high-dollar chicken and pea luncheon spanning the country.
Although many of the functions the Fed conducts are business as usual, the big difference today from years gone by is how the Fed fails to speak with one voice. Now, investors have to play the proverbial guessing game, which results in market volatility.
This past Friday, the 10-year Treasury briefly traded under 2.3% before reversing higher into the market’s close. It left U.S. Treasuries little changed as stocks and the U.S. dollar spent time recovering from the Obamacare repeal/replace drama that culminated in the House of Representatives’ failure to vote on the proposed reform legislation on Friday, March 24. Key U.S. economic data for the week was light of consensus (ISM Services, Non-farm payrolls), but U.S. gross domestic product (GDP) growth for the fourth quarter of 2016 was finalized at a 2.1% seasonally adjusted annual rate, which was revised up from the prior estimate of 1.9%. The GDP forecasts for Q1 are all over the place, with the Atlanta Fed’s model forecasting 1.2% while the New York Fed’s model shows 2.9% growth.
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