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What's a word? With regard to the Federal Reserve, a lot. The removal of the word "accommodating" from the Fed's statement on Wednesday was interpreted as a sign that the Fed is approaching the end of its interest rate hike and that bond yields have fallen slightly. But the real story is the rise of uncertainty as the guidance is replaced by implicit shrugs implied by Fed Chairman Jerome Powell's well-adapted shoulders.
Mr. Powell appeared to be doing his best to confuse investors at his press conference. Having been "accommodating" as a description of the current monetary policy – something that many have anticipated – he went on to say, "It was not because the policy was not accommodating. It's always accommodating.
Instead, he explained that the word had survived its usefulness as a signal to the markets of what the Fed was trying to achieve.
The focus on one word highlights two important market truths: the Fed is not focused on supporting the economy, which is doing very well on its own; and the Fed no longer feels such a need to reduce future policy rates to get investors to help. The result is that things may become much more confusing for the markets.
The first is well understood, in part because interest rates are higher than the Fed's underlying inflation measure for the first time since the collapse of Lehman Brothers a decade ago. The policy is clearly no longer as strong support for the economy as when interest rates began to rise.
The second is less obvious at first. The Fed is still publishing its dot chart, in which policymakers predict that the economy, inflation and interest rates will disappear. It always explains where a sustainable unemployment rate is (a median estimate of 4.5%, higher than today's) and where interest rates are directed (the median goes up to 3.4%). in 2020 a long-term level of 3%). And Fed policymakers often make speeches designed to help investors understand how the central bank will react to economic developments.
Still, Mr. Powell has tried to emphasize how little the Fed knows. On Wednesday, he insisted on the uncertainty in the forecasts to two or three years. He explained that the Fed does not have a precise understanding of the policy that would be accommodating. He said he hoped the government's tax cuts would lead to improvements on the supply side, but they were also very uncertain. And he mentioned the idea that the Fed's so-called "neutral" rate, where monetary policy does not support or hurt economic growth, could be increased.
In short: the Fed does not know what will happen or how it will react.
We should be careful not to go too far. The Fed never really knew what the economy would do, and it might have violated its previous predictions if the economy had turned out to be different. After all, the Bank of Canada broke its forecasts when its economy recovered more quickly than expected and the Bank of England had to give up its first orientation attempt after six months.
Yet, investors are becoming more used to central banks. Mr. Powell's backtracking should increase uncertainty, that is, a wider range of results will filter prices. Other things being equal, this should mean lower stock prices and bond yields.
In some respects, this is in any case what happens in the markets, because better results and much worse results become obvious opportunities. The commercial battles, the Brexit, Italy and emerging market crises are highly visible threats. Indeed, rumors about the Italian budget have pushed the dollar higher against the euro Thursday morning that the Fed did Wednesday. Similarly, growth in the United States, driven by tax cuts, has been much stronger than expected and inflation has remained low, increasing the chances that the United States will contribute to growth in the rest. of the world.
A wider range of results should encourage investors to take fewer risks, hold fewer or more defensive stocks and safer bonds, even if the central forecast remains unchanged. It's the true meaning of no longer being "accommodating".
Write to James Mackintosh at [email protected]
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