BarrOMetrics Views: FOMC II

I was going to conclude “The Thin Line” today but the FED decision takes precedence. Besides, I received a flood of emails commenting on the ‘The Thin Line’ that needs to be read. I’ll conclude that piece tomorrow.

Yesterday, the FED tried to have it both ways: it did not drop ‘for a considerable time’ (commit to keep rates low) but did indicate that it would raise rates at a faster rate. It now is looking for a rate rise to 1.25% to 1.5% by end 2015 (instead of a max 1.25% by end 2015). This suggests that the latest rate rise would have to begin by June 2015 and this would be followed by a rate rise at every meeting thereafter to reach these levels. This is because there are only 8 FED meetings a year.

Also note that the FED expects the rate to be 2.75% to 3% by end of 2016. This suggests another 6 rises in 2016.

My question is whether Yellen will have the stomach to keep to this roadmap if the stock market starts to tumble.

The reaction to the FED was pretty much as anticipated:

  • The USD went up (except against the GBP, we’ll need to await the result of Scottish vote  for that decision)
  • The S&P gyrated around and ended with a neutral. To shake the belief that the FED will jump in to save any decline, it appears we’ll need to see clearer evidence that the punchbowl will be withdrawn. Let’s see what happens.

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