Will the Fed hike in May? Or July? Or September 2015?
Who cares. Unless you’re trading some kind of calendar spread it doesn’t make that much of a difference.
I’m reminded of a quote from former St. Louis Fed President Bill Poole that was on my bulletin board for years:
Poole believes people in the press and financial markets are usually asking the wrong question. ‘What is important is not the policy action at the next FOMC meeting,’ he said, ‘which is typically what people want to know, but the policy regularity that will extend across many FOMC meetings, which is what people should want to know.’
The questions that are going to really move markets are:
- How quickly will the Fed will be hiking rates once the cycle begins?
- Where is the terminal destination of rates?
What I think will happen is that the Fed will begin to hike rates around this time next year and bring rates to 1.00%. That will shake out some of the financial risks and excess liquidity in markets, it’s a responsible and healthy thing to do.
What’s not expected is that rates might stay there for a period rather than continuing higher. Right now the bulk of the FOMC sees rates in the 2-3% range at the end of 2016 and 4% in the longer run
If the Fed ratchets those down by about 100 bps each, it’s much more important than the exact timing of the first hike and that’s something they can do to limit the effect of hikes on long term borrowing rates.
Yellen sees a hawk in the corner of her eye
