Data-dependent monetary policy implies surprises
Last week’s disappointing labour market data have turned the FOMC meeting of 14-15 June into a non-event. This is a logical consequence of a monetary policy which is data-dependent: big surprises have a considerable impact on market expectations about the next policy decision and last week’s surprise wasvery big and negative. The accompanying chart shows, based on Fed funds futures pricing, the probability that at the end of the 26-27 July meeting the Fed funds target rate would be in the 0,50-0,75% range, implying a 25 basispoints hike. This probability has been very volatile since the start of the year, reflecting big swings in market expectations about Fed action. The recent drop came after the payroll numbers, the previous jump after the release of the moderately hawkish minutes of the 26-27 April meeting.Should we care?
The market expects the Fed to stay very cautious
The bond market is pretty relaxed about it, at least judging by the narrow trading range of the 10-year treasury yield since January. This suggests that investors are of the view that even though the FOMC might at some point hike its policy rate, that it will continue to adopt a very cautious stance.Does this mean analyst comments and market jitters are a case of ‘much ado about nothing?’ No, because central bank tightening is a serious matter in particular when rates have been so low for so long. In such a world, even minor moves canmean big changes in sentiment.
William de Vijlder