The Fed: Shifting into neutral?

The Fed: Shifting into neutral?

The FOMC minutes showed Powell's Fed to be a slightly more dovish place; Turkey's Erdoğan let the market win one round; Russia and Saudi Arabia discussed opening the spigots to calm the crude oil markets.

"It's always better for all political leaders to let the central bank governors do the job that they have to do, and to preserve and secure their independence."
IMF Managing Director Christine Lagarde

The Fed: Shifting into neutral? Newly-released minutes from the May FOMC meeting showed subtle changes in both style and substance from Dr. Yellen’s Fed. These shifts suggest that Chairman Powell appears to favor the role of moderator over individual contributor.

But the most important shift was on substance – namely, a slight tilt toward a more dovish stance. Specifically, the majority believed that interest rates are quite close to a “neutral” level, neither overly stimulative nor restrictive. And the prevailing belief was that it would be preferable to allow inflation to be somewhat greater than 2 percent, despite the strength of the labor market.

In practical terms, all this can be read as implying that the Fed, all else equal, envisages the need for two hikes in the remainder of 2018 rather than a more hawkish three.

Financial markets reacted immediately and positively. U.S. Treasury yields fell, pulling the 10-year back below the 3-percent threshold, to 2.944% as of 8:27 AM EDT.1 In stocks, the S&P 500 rose over 23 points to 2733.3, or 0.9%, intra-day.

Emerging Markets: Turkey in the weeds Given the pressure on emerging market assets from the rising dollar, the timing of the next presidential election, now scheduled for June 24, is unfortunate. That’s especially true because Turkey’s President Recep Tayyip Erdoğan chose this week to boost his popularity by suggesting an end to the policy independence of country’s central bank, and pushing toward significantly lower interest rates as a means of boosting growth.  

Erdoğan’s strong-arm tactics hit the Turkish lira hard, sending it about 8 percent lower within 24 hours, declining as far as 4.9253 per U.S. dollar. After seeing the result of his statements, and after at least one conversation with his country’s central bank, he’s been silent on the issue since; the 300 basis-point emergency rate hike to 16.50 percent on May 23 appeared to stem the tide for a few hours. Other central bank moves since that time have included allowing exporters to repay dollar loans in Turkish lira at a 4.2 lira per dollar rate, substantially more advantageous than exporters can now get on the open market. As of Friday May 25, the lira was trading at between 4.8 and 4.7 per dollar. But another rout could happen as soon as Erdoğan makes his next campaign promise.

Global oil: Getting a grip After Brent and WTI crude oil prices rose past $80 and $72.50 per barrel on May 22, key suppliers Saudi Arabia and Russia announced their willingness to open the spigots, in an attempt to moderate the run up in prices since early April. Saudi Arabia is unlikely to meet resistance from the rest of OPEC, given its aversion to unintended price hikes; the current price moves appear to be in reaction to the collapse of Venezuela’s ability to extract and export oil, as well as the prospect of renewed sanctions on Iran.


1 All data Source: Bloomberg, at the time specified


West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content. It is the underlying commodity of Chicago Mercantile Exchange's oil futures contracts.

Brent Crude Oil is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content. Brent Crude is extracted from the North Sea and comprises Brent Blend, Forties Blend, Oseberg and Ekofisk crudes.


[1] All data Source: Bloomberg, at the time specified.


[1] All data Source: Bloomberg, at the time specified.


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