Market Mistakes Balanced Fed for Dovish Fed

Market, Mistakes, Balanced, Dovish, Fed, fundamental, analysis, fundamental analysis, fx trader, forex

20 Mar 2015

The extremely dovish market reaction to the outcome of the FOMC meeting was more a function of the dot-plots than the FOMC statement or Yellen's press conference. 

Methodologically, we have argued that the Federal Reserve is like the Chinese Communist Party in that policy emanates from a central committee. That central committee at the Federal Reserve is composed of Yellen, Fischer and Dudley. The FOMC statement is their organ--the must succinct expression of their views.

The statement was balanced, recognizing that growth had moderated and exports had slowed. However, the word patience was dropped and the FOMC completed its transition to a data-dependent stance from the date-driven forward guidance. In response to questions, Yellen noted that despite the moderation in economic activity, the Fed still anticipated growth to be above trend. 

The hawkish regional presidents  appear to have moderated their views. The shear number of meetings let this year with a move in April ruled out, forced an adjustment to the year end forecasts in any event. There had been a substantial gap between the Fed's dot plots and what the market had priced into the Fed funds and Eurodolllar futures strip. The Fed took a big step toward the market's views, while the market moved its views a bit as well. The gap has narrowed at an absolutely lower rate level. 

Moreover, two hawks, Plosser and Fisher (Cleveland and Dallas Fed Presidents respectively) will be stepping down shortly and this will impact the dot plots. Minneapolis Fed President Kocherlakota, a dove, is also resigning.