Wednesday, we read about the decision from the Fed to change language and perhaps a slow pivot in policy. As expected, they removed the word “patient” from the statement, and to nobody’s surprise Chair Yellen pulled back on the perceived hawkish talk. She is clearly in control and will not be undermined.
The Fed has been very consistent in presenting policy, what they are looking for, and the challenges that lie ahead. It’s not difficult to read the tea leaves, as they are very transparent, yet many out there believe there is a devious tactic at work.
In this latest policy statement, the Fed gives themselves more latitude and flexibility, as it relates to policy, so we should not expect many surprises. The market agreed, not only did equities roar post-statement, but volatility was crushed. The prior fear of the unknown was removed, and though many were worried the removal of “patient” would cause a major decline, it was not to be.
In fact, the VIX had been telling us the market was sanguine about the Fed meeting all along, having dropped sharply leading to Wednesday. Further, a shift in policy would have crushed bonds, and that certainly didn’t happen.
Bonds were up sharply and followed through from earlier in the week. The only weak link on Wednesday was the dollar, but that was probably some aggressive profit-taking in the wake of a massive surge since last summer.
The mandate of full employment and price stability is still in place, and they continue to look for a rise to 2% inflation. Expectations from the forecast were downgraded for inflation and GDP, recognizing the strong dollar may dampen exports.
So, the Fed’s message continues to be “watch the data”. We should be doing the same, too.
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