So says Rabobank in their note:
- The most benign interpretation of ... Congressional testimony from Fed Chair Yellen is that the Fed is sticking to its course of gradual rate hikes as planned, and will soon begin to roll back its bloated balance sheet ... perhaps flagging this as soon as September.
- A much less benign interpretation is that within the Great Gamble of raising rates in the New Normal that we raised yesterday, the Fed is the world's worst poker player and is already getting ready to fold.
- What else can one make from the statement that Fed Funds at 1.25% "would not have to rise all that much further" to get back to neutral?! What does that mean, exactly - another three hikes over 2017-18? If so, and presuming that Yellen is also right that US inflation is going to go down near-term but this will be "transitory," and followed by a return to 2%, then she is implying a neutral Fed Funds rate is a zero real Fed Funds rate (2% rates, 2% CPI).
- That is despite the fact that over the last two weeks the Fed has spent its time underlining the threat posed by the low US employment rate and -heaven forfend!- "rich" equity valuations.
- On both those fronts it therefore gave us a stern poker-face and let the market believe it was serious about pre-emptive hikes: as a result, bond yields surged almost everywhere and equities wobbled.
- Yet after the latest Fed testimony equities were up across the board after not getting a mention from Yellen, the 10-year US Treasury yield is back as 2.32%, dropping 5bp when her testimony's text was first released, the odds of a December hike dropped back from 49% to 45%, and the USD index knifed downwards before stabilizing.
- So we are left with a dovish Fed hawkishness that appears to mean something and yet nothing. As former Fed Chair Alan Greenspan infamously stated in a similar forum to that of yesterday "If I seem unduly clear to you, you must have misunderstood what I said."
- The market seems to understand this Fed all too well though - or at least equities do.
Good points from Rabo - lets see how this plays out
