Fed sounds as hawkish as it did early in the year - AmpGFX

In view of analysts at Amplifying Global FX Capital, US data flow is sending a warning that the economy may be stalling and inflation falling well below target, still the Fed sounds at least as hawkish as it did early in the year. 

Key Quotes

“It appears even more honed in on the tight labor market and expressed surprising confidence in its forecast for 2.0% inflation next year.”

“A key reason for this, several analysts have posited, is that despite the policy easing to date, US and global financial conditions appear to have eased. Rising equity and house prices, lower bond yields and tighter credit spreads have boosted consumer wealth, and corporate access to capital.”

“The FOMC June policy statements made little reference to financial conditions, but New York Fed President Dudley mad it clear that indeed the Fed has financial conditions firmly in mind in his speech at the BIS annual meeting on Monday.”

“An important implication is that the Fed policy function more clearly includes financial conditions (equities, bond yields, credit spreads); this basically means that the Fed is now more influenced by the equity market.”

“This is not necessarily a surprise to those that have often spoken of the Fed put-option for the equity market, first popularized by the so-called Greenspan put, suggesting the Fed tends to act to prop up the equity market.  However, in the current context, the Dudley speech suggests that the Fed might act to cap the equity market (‘Dudley-call’?).”

“In other words, the Fed may keep hiking rates, until the equity market rally stalls.”

“If you are an equity investor, the comments from Dudley should give you pause.  If the recent economic data suggest demand is stalling and pricing power is deteriorating, the prospect of further Fed policy rate hikes poses a significant risk of equity market correction.”