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Markets live special: Janet Yellen presser edition

Summary:
6:23 pm CG6:23pmHello! MCK6:23pmHowdy AS6:24pmHey everyone, welcome to the dovish rate hike ML 6:23 pm CG6:24pmRabble, show yourselves if you're there CG6:24pmSay hello Boncoeur Hello from England. MCK6:24pmHere is the statement https://www.federa...tary/20170315a.htm 6:24 pm MCK6:24pmAnd here are the latest projections https://www.federa...ojtabl20170315.pdf Brazzo Hello from Brazil AS6:25pmHi Boncoeur AS6:25pmSo Kashkari with the dovish dissent! 6:24 pm CG6:25pmOkay, so a few changes to the statement, besides the obvious raising of rates into the 3/4 to 1 percent corridor CG6:25pmBoncouer, brazzo, hello! Ken J

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CG6:23pm

Hello!

MCK6:23pm

Howdy

AS6:24pm

Hey everyone, welcome to the dovish rate hike ML

CG6:24pm

Rabble, show yourselves if you're there

CG6:24pm

Say hello

Boncoeur Hello from England.
MCK6:24pm
MCK6:24pm

And here are the latest projections https://www.federa...ojtabl20170315.pdf

Brazzo Hello from Brazil
AS6:25pm

Hi Boncoeur

AS6:25pm

So Kashkari with the dovish dissent!

CG6:25pm

Okay, so a few changes to the statement, besides the obvious raising of rates into the 3/4 to 1 percent corridor

CG6:25pm

Boncouer, brazzo, hello!

Ken J Hello. How many hikes this year then?
MCK6:26pm

Some of the inflation language comes off as a bit more dovish. Look at the WSJ's track-changes document: http://graphics.ws...statement-tracker/

ArthurDent42 Hello from Austin
AS6:26pm

who's ready to talk dots?

AS6:26pm

Markets live special:  Janet Yellen presser edition

Boncoeur Equities jumped, like they always do, regardless hike or cut.
CG6:26pm

Fed took out the line that "In light of the current shortfall of inflation from 2 percent...". Combined with the addition of the word "sustained" in the last sentence of the prior paragraph, this suggests that the Fed sees inflation as close enough to its target that it can now focus on its remaining near 2 per cent instead of worrying about hitting the target in the first place.

Boncoeur Have the dots tightened
CG6:26pm

Ken, Arthur, hi!

Boncoeur ?
MCK6:26pm

Equities jumped, dollar down, long rates down

AS6:26pm

the majority see three this year

CG6:26pm

three hikes

AS6:27pm

that's the long line in the 2017 dot plot

MCK6:27pm

The projections are almost identical to what they were in December

CG6:27pm

as expected, i think

MCK6:27pm

Except the "long-run unemployment" forecast (aka NAIRU) ticked down from 4.8% to 4.7%

AS6:27pm

I'm interested in what's happening to the dollar right now

Boncoeur Need a GIF maker to show animation illustrate evolution of forecasts
AS6:28pm

yeah so Boncoeur, the December dots weren't quite as settled on three this year

AS6:28pm

I'll post in just a moment. And good idea on the GIF

Brazzo so core inflation at 2,2% today and FED looking at PCE 2 years from now
AS6:29pm

et voila:

CG6:29pm

Fed's estimated nairu proxy keeps following the actual unemployment rate down. I think it's now fallen by nearly a full percentage point from its peak during the crisis

AS6:29pm

December:

AS6:29pm

Markets live special:  Janet Yellen presser edition

AS6:29pm

Now:

AS6:29pm

Markets live special:  Janet Yellen presser edition

Boncoeur consensus growing for both 2017 and 2018
AS6:30pm

the skinny oval shape for 2017 turned into a... UFO sort of shape

MCK6:30pm

CG, this a good example of why NAIRU is a bad guide for policymaking

Ken J USD down on no surprise. I suspect it'll be even downer after the presser
CG6:30pm

NOT NOW KLEIN

CG6:31pm

presser starting any sec

MCK6:31pm
Boncoeur Consensus to a huigher level it seems. This is hawkish surely!
CG6:31pm

ta

Boncoeur ah no, reading it wrong.
Boncoeur oh , too many dots
AS6:32pm

bc people were thinking maybe four this year, Ken J?

MCK6:33pm

Yellen says rising labor participation rate is a sign of strengthening job market

Ken J And bc Mrs Yellen always sounds dovish!
Ken M Can we interpret anything about their views of the passage/efficacy of the Trump agenda given the unchanged GDP forecasts?
CG6:34pm

LFPR close to flat for a few years now after precipitous decline during recession. If it starts going into reverse, then those worried about labor market slack can claim victory. (Nb: like me)

Boncoeur I don't speak TEXT, is "bc" short for because?
MCK6:34pm

Ken M, standard practice is to avoid making forecasts about fiscal policy unless legislation is in the process of being passed

AS6:35pm

heh, yes Boncoeur that's it

AS6:35pm

Of course you can "avoid making forecasts" and then magically decide the same economic forecasts require tighter policy all of a sudden

Boncoeur oh, she referenced congressional legislation.
MCK6:35pm

This came up in the December press conference. As long as nothing of the Trump agenda actually begins going through Congress, the Fed won't look at it too seriously.

VIXAL Have BE and PM already left the office?
MCK6:36pm

AS, policy hasn't actually tightened!

CG6:36pm

My guess (and that's all it is) is that 235k jobs growth last two months, plus the recent wage numbers, have made them more comfortable that econ will be fine this year even in the absence of a robust Trump agenda getting passed

AS6:36pm

but no politics here! to be honest, though, I don't think it has much to do with the perceived success of the Trump agenda, just the reflationary mood that's come into markets

CG6:36pm

that too, global growth conditions firming up since last summer helping

CG6:37pm

Vixal, want us to pass along a message?

MCK6:37pm

Yellen currently talking about the longer-run level of "neutral" real short rate, which Fed currently estimates is about 1%

AS6:37pm

and yes it's just us VIXAL, here's hoping BE and PM have had a pint or two by now

Boncoeur oh, she says median path unchanged (dots).
MCK6:37pm

Right now real short rate is about -1%

MCK6:38pm

"Fiscal policy is only one of many factors that can influence the outlook"

VIXAL @ CG @ AS: they find so much RAW that they deserve to leave early / have a pint or two
CG6:38pm

No change in reinvestment policy; suspect they won't start shrinking balance sheet for a while now

Ken M It's interesting because there is something of a disconnect between the equity markets, which are making a lot of assumptions about the passage and the effects of the Trump agenda, and the Fed which doesn't consider them. This is significant because the equity markets are also making assumptions about Fed policy.
AS6:38pm

"as a matter of prudent planning we discussed at this meaning a number of issues related to an eventual change related to our reinvestment policy"

CG6:38pm

says they discussed it though

MCK6:39pm

"Normalizing balance sheet will be gradual and predictable"

CG6:39pm

Ken M, good point

MCK6:39pm

Our man Sam Fleming up with first question

AS6:39pm

first question, balance sheet!

Boncoeur I agree with Ken M
MCK6:40pm

Ken M, for what it's worth, there is an argument that equities are mostly reacting to a deregulatory agenda from the executive rather than Congress https://www.ft.com...-96f8-3700c5664d30

AS6:40pm

though the Fed does consider equity markets in its policymaking decisions

Boncoeur "active tool" is Fed speak for "marginal policy instrument" in BofE speak.
AS6:40pm

so in a way, they are considering his agenda, just reflected through a risk-market mirror

MCK6:41pm

Yellen is saying the Fed understands its short rate tool better than its asset purchase tools. It's not clear to me why they think this, although it's been the official line for a while.

CG6:41pm

Yellen says she can't define "well under way"

CG6:41pm

Should consider it in qualitative terms, which she suggests is about confidence in the economy's trajectory

CG6:41pm

resistance to new shocks, etc...

AS6:42pm

the mechanics of shrinking the balance sheet will be interesting as well

AS6:42pm

(agreed, VIXAL)

b k i hope she clarifies what the inclusion of the word -symmetric- means
AS6:43pm

the RRP facility -- the way they keep one side of the corridor in place -- is them lending out the securities on their balance sheet overnight

CG6:43pm

three increases this year "qualifies as gradual", though there's no definition for what a rapid pace of increases in rates would look like

MCK6:43pm

Yellen currently explaining the concept of the "neutral" short rate

MCK6:43pm

Which, it should be noted, is something nobody knows how to measure, and many don't even agree that it exists

AS6:43pm

I'm sure they have bright minds on this case, but it'll be interesting to see whether they plan to keep using a corridor as they continue to wind down the balance sheet

CG6:43pm

says current rate is below the neutral rate, through not that far below it

JC Balance sheet will start to runoff when???
CG6:44pm

matt will have abolished monetary policy by the end of this session

MCK6:44pm

CG, their estimate of longer-term neutral is about 1% real, vs about -1% real right now

AS6:45pm

and here we have our Trump question

Boncoeur @MCK: is the short netrual rate called r* or the Wicksellian rate (or both)?
CG6:45pm

indeed, Leisman of CNBC

AS6:45pm

at JC, they kept the same language about the balance sheet in this statement

CG6:45pm

we'll get a direct answer to the earlier question

MCK6:45pm

@Boncoeur, yes, both

JC Hard for the govt to start paying interest again on $4T
AS6:45pm

but said they've started discussing some of the issues about the rundown of the balance sheet

Boncoeur @MCK: are you Austrian school?
AS6:46pm

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way.

AS6:46pm

they aren't expected to start selling JC, so it won't happen all at once

AS6:47pm

general consensus is they'll let that $4T run off gradually

MCK6:47pm

But not all $4 trillion

JacobinVA I'm surprised to see on the dots that more folks expect 4 hikes than expect 1-2 hikes in 2017 (though obviously 3 is most popular option)
AS6:48pm

Right -- but it's still a rising amount of supply in the market

MCK6:48pm

There is a lot of ambiguity about how big the balance sheet should be by the time they have finished "normalizing"

CG6:48pm

"We have plenty of time to see what happens", which made me chuckle because it sounds like "These clowns can't tie their shoes, much less pass sophisticated new tax-and-spend legislation"

AS6:49pm

MCK, good point, and the use of the RRP facility is usually just in the hundreds of billions per day

MCK6:49pm

@Boncoeur, I just try to stick to what makes sense and question things that don't

AS6:50pm

($226.5bn yesterday, for example)

AS6:50pm

Jacob after all the talk from the Fed this month people seemed to think the choice was between 3 & 4 hikes

JacobinVA So MCK, how big is the range of balance sheet ambiguity? I.e. are we not sure if they're going to end up at $2T or $3T (or $1T?)
CG6:51pm

Getting to know Mnuchin, they discussed economy, regulation, Financial Stability Oversight Committee. Was "introduced" to Trump, had "very brief meeting". My guess is "just as long as it took me to ghost, but gracefully"

AS6:52pm

(w/r/t politics, the real question is who the Trumpian appointments will be, of course)

CG6:52pm

JacobinVA, nobody knows, though my guess is they'll end up at least well north of 1T, with the range going all the way up to "not much lower than now"

WRC We don't even know when the balance sheet wind down will start. Isn't it a bit too early to speculate on what the ending point will be?
Boncoeur Perhaps QE and reverseQE are too inaccurate as tools. Elephant guns?
CG6:52pm

and i'd lean towards the latter, frankly

MCK6:52pm

@JacobinVA there is about $1.5 trillion in currency right now, so that's a floor, plus it will grow significantly as they begin to normalize

MCK6:53pm

I would say based on currency in circulation alone that $2.5 trillion is probably the floor by mid 2020s

AS6:53pm

See I used to think so, CG, but they've really stuck to the narrative that they'll wind down

MCK6:53pm

Plus you figure there are other Fed liabilities that aren't going anywhere

Boncoeur Great question about moves in WIRP
AS6:54pm

(Sounds about right MCK. Point being that $2tn is still a notable amount of supply)

Boncoeur Sorry WIRP is a bloomberg term, "CME Fedfwatch" I should say
AS6:54pm

WRC, when is it ever too early to speculate??? Wink smile

WRC True, true.
MCK6:55pm

The thing about balance sheet reduction that will be really interesting to watch will be the impact on mortgage financing. Fed has been ultimate buyer of roughly all the net new mortgages in the past few years.

AS6:55pm

"It is true that in 2015 and 2016 each we raised the Federal funds rate only once, and perhaps market participants have been influenced by that pattern"

AS6:56pm

in response to that WIRP question

Boncoeur @MCK: that Fed buys mortgages would make me very cross if I was US citizen and locked out of property market.
CG6:56pm

She didn't really answer this question about why markets were so out of sync

CG6:57pm

BIS question from Binya about asset prices

CG6:57pm

elevated equity markets specifically

MCK6:58pm

@Boncoeur, fair, but more people own housing than don't, and for most of those people it is their biggest asset, so if you want to stimulate the economy via the "wealth effect"...

AS6:58pm

seems like the quiet, implied answer to the markets Q was: international pressures caught us by surprise so we didn't hike like we said we would

CG6:58pm

risk spreads for HY narrower, along with higher stock prices, so easier

MCK6:58pm

(I say this as someone who pays through the nose to rent)

CG6:58pm

but USD stronger and long rates higher, pushing other way

MCK6:59pm

"What do you expect to find at the G20?"

MCK6:59pm

Embarassed smile

AS6:59pm

she cites indices that attempt to sum up "all of these different factors affecting financial conditions" -- like the one at GS that Dudley worked on

CThwaites How about Neel K? Proud of him.
Boncoeur @AS: you got a link to GS financing conditions (pretty) please?
AS7:00pm

He's always the contrarian, CThwaites

MCK7:00pm

New question about disconnect between confidence as measured by surveys and the lack of policy action

CG7:00pm

another Q about fiscal policy disappointments

CG7:01pm

might worry about it through sentiment-channels, though it's uncertain how that works

Mari maybe because NK just worries about too big to fail... and low rates are great for that!
MCK7:01pm

"I wouldn't say at this point we have seen hard evidence of change in spending decisions based on expectations about the future"

AS7:01pm

Boncoeur, links to GS research aren't publicly available... lemme see if anyone else has it

CG7:01pm

wow, "no hard evidence"

AS7:01pm
MCK7:01pm

Tempted to say Yellen is implying expectations and sentiment surveys are garbage

AS7:02pm

(feel free to disregard the other offerings on the website of that data provider)

Boncoeur @AS: you are total star, thanks very very much.
CG7:02pm

haha, her view on this is probably more nuanced than that but fwiw that's also how i heard it

MCK7:02pm

CG, more seriously, Yellen has long been skeptical about the importance of inflation expectations

AS7:02pm

That's especially strange, CG and MCK, because a year ago she was implying the same about market-based expectations

AS7:03pm

(so we can't rely on market or survey expectations now?)

CG7:03pm

yeah, i remember all that

MCK7:03pm

Nobody expects...THE GREAT REFLATION TRADE

CG7:03pm

wait, is the bbg reporter "taking the opposite side" of the fed chair here?

CG7:03pm

i certainly don't mind, but it's a break from protocol of just asking questions

AS7:03pm

Markets live special:  Janet Yellen presser edition

CG7:04pm

is she recording a podcast at this presser?

Boncoeur That's the Hays Advantage
CG7:04pm

is this reporter auditioning for the committee now that tarullo is stepping down

MCK7:05pm

I like the tenor of this question insofar as there has been little explanation of why to hike now versus February versus May

CG7:05pm

a good Q though!

MCK7:05pm

It is a little bit arbitrary

worcesterwoman Good evening
CG7:06pm

Yellen giving credence to Team Slack

CG7:06pm

(hi worcesterwoman)

CG7:06pm

This is great. Now asking followup

AS7:07pm

"what if GDP doesn't grow that fast"

Ken J "data dependent" bingo
CG7:07pm

I hope that Hayes has just established a new trend for these pressers, making them more like political Q&As

AS7:07pm

my question is who ends up playing Yellen on SNL

Boncoeur @CG: yeah, great, turn Yellen into Spicer.
MCK7:09pm

Question now about next-gen Glass-Steagall (separate investment banking from commercial banking)

CG7:09pm

Glass-Steagall question. (And Kate McKinnon obvs gets first dibs on any spoofs.)

AS7:09pm

good call CG

MCK7:09pm

For those who don't remember, the Republican platform had something about Glass-Steagall in it this year https://www.ft.com...-88c5-db83e98a590a

AS7:10pm

but now they're saying "for the 21st century"

AS7:10pm

which means... separate HFT from investment banking from commercial banking?

MCK7:10pm

"What message are you trying to send to consumers with this rate hike?"

CG7:11pm

"The simple message is the economy is doing well."

AS7:11pm

JOLTS mention

MCK7:11pm

What Yellen might be thinking: "We would like you all to spend a little bit less and save a little bit more"

Boncoeur JOLTS=Job Openings and Labor Turnover Survey ?
AS7:12pm

yep, she talked about people feeling comfortable enough to quit jobs

AS7:13pm

and now we get a q on the definition of symmetric

MCK7:13pm

@Boncoeur, yes

AS7:14pm

"2% is not a ceiling on inflation, it's a target"

CG7:14pm

DRINK

Boncoeur DXY down some more, so Ken J looks proved right.
MCK7:14pm

"More like guidelines" (sorry)

AS7:15pm

(I will do you a solid & not GIF that one MCK)

CG7:15pm

I'd love a question about the "running hot" research she mentioned in September

WRC I could just see Draghi burning with jealousy that Yellen can say things like that (not a ceiling, target).
MCK7:15pm

CG didn't people ask about that in December?

AS7:15pm

question about the BAT/DBCFT

Ken J @Boncoeur - thanks!
AS7:15pm

(border adjusted tax/destination-based cash flow tax)

MCK7:15pm

And Yellen basically said that she didn't mean it, it was just an idea for more research?

AS7:16pm

hmmMMmmm Yellen seems to have thought a lot about these fiscal policies

CG7:16pm

She said that it was worth researching, not that she would do it. I don't remember anyone asking her "Given the Fed's better track record and credibility for lowering inflation when it overshoots than bringing it back to target after a crisis, why not try it?"

CG7:17pm

If you're feeling cheeky, could add: "Given there's much danger, then you'd also have the data point", though I wouldn't advise it

AS7:17pm

Ah, this is an interesting bit. It seems like she's saying the border-adjusted tax wouldn't be the same situation that we had during the global growth scare

Boncoeur 3:18pYellen: Border-tax proposal's likely impact on the dollar is uncertain
Boncoeur I thot BAT was very dollar bullish.
MCK7:18pm

Question now is about schedule of rule-writing. Answer seems to be that "we have a light agenda at this point"

AS7:19pm

2015/early 16 was flight to safety in USD denominated assets, any currency moves in the USD after a border-adjusted tax would be related to trade

AS7:19pm

so to simplify a bit, still bullish, but driven by fundamentals rather than financial markets @Boncoeur

CG7:20pm

okay folks, that's it

AS7:20pm

and it's not clear HOW bullish it would be -- the economic models say the dollar would move to offset the change in trade

CG7:20pm

last call for takes

Boncoeur I have no conclusions to make here.
Ken J She sounds v complacent on price inflation. Thanks for the coverage
AS7:21pm

but real-world stuff (like financial flows, etc) could have an unpredictable impact

CG7:22pm

it seems to me that the FOMC is mostly happy with the glide path of inflation and employment towards their objectives, but cautiously recognize that the gains remain fragile, so even as they hike rates this time, they're smart enough not to sound too triumphalist, lest the markets interpret it as a hawkish move

AS7:22pm

that last question gives the impression that Fed officials are thinking about the implications of fiscal policy proposals, even if they're not basing their policies on them, which is generally a good thing

MCK7:22pm

Before the meeting's results were officially released, there was almost universal consensus the Fed would raise policy band by 25 bps today. That consensus developed over a two-day span in which Fed officials gave lots of obvious hints they were going to move. Longer-term rates were flat throughout that period and have basically been unchanged since November, which suggests today's move was about tweaking the timing rather than adjusting the overall slope of the policy path.

Boncoeur Interesting, as its first hike in Trump era
MCK7:23pm

And in fact, the projections, statement, and press conference confirm this. The Fed's outlook hasn't really changed much, they simply decided to shift the timing slightly. Why they did that is unclear. But given that long rates and the dollar are both down on the news, suggests it didn't really tighten financial conditions in any meaningful sense.

Boncoeur @mck: the dots got more focused, don't forget.
MCK7:24pm

The most interesting thing from the press conference, for me, was Yellen's scepticism of survey data and expectations, which fit nicely with the Fed's refusal to incorporate any expected changes to fiscal policy in its forecasts.

Boncoeur growing consensus that is.
Boncoeur wow, look at the yield curve
Boncoeur 3 Month 0.71% 0.00 (0.00%)6 Month 0.79% -0.01 (-1.25%)2 Year 1.30% -0.08 (-5.80%)5 Year 2.02% -0.10 (-4.72%)10 Year 2.51% -0.07 (-2.71%)30 Year 3.11% -0.04 (-1.27%)
AS7:28pm

Interesting @Boncoeur. could be positioning-driven?

AS7:29pm

Well that's it for us, folks

AS7:29pm

See you next time, thanks for dropping in

WRC Thanks for the coverage
MCK7:29pm

And stay excited for the Dutch election results

Boncoeur Thanks for good session bye.
Boncoeur Ah Dutch exitm poll in 30 mins,.
Ken J Off to the Netherlands! Good luck all.
AS7:29pm

Cardiff says bye too.

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Alexandra Scaggs
Alexandra Scaggs is a markets reporter for the Wall Street Journal in New York. She writes about the U.S. stock market and investment trends. She also covers the business of markets research, writing on the calls, personalities and moves of high-profile analysts and strategists. Ms. Scaggs graduated from Washington & Lee University with a degree in business journalism.

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