The Federal Open Market Committee (FOMC) has begun its two-day policy meeting, and we predict no sleep for Chair Yellen.
The committee has much to discuss, especially based on this morning’s stronger-than-expected inflation data. Consumer prices are rising faster than forecast, both monthly and annually. This presents a communication challenge to a Fed that has adamantly promised “highly accommodative policy” for “an extended period."
The data may also explain why 55 percent of economists surveyed in a new Bloomberg poll believe Eurodollar futures underestimate the pace of tightening over the next two years. Currently, futures imply just a 47 percent probability the Fed’s benchmark interest rate will be 0.75 percent or lower at the end of 2015. Clearly, traders are betting on past Fed communiques, whereas economists are relying on their own forecasts.
The clarion voice arguing that the Fed is behind the eight ball is Deutsche Bank Securities Inc.’s Carl Riccadonna. He and his boss, chief economist Peter Hopper, believe the U.S. economy is accelerating faster than the Fed lets on. While some committee members, like Federal Reserve Bank of Dallas President Richard W. Fisher and his Philadelphia counterpart Charles I. Plosser, have argued for faster tapering of bond purchases, most have maintained a more dovish tone in line with Chair Yellen.
Mr. Riccadonna joined us on Surveillance this morning. When we asked him what’s changed to make him so much more optimistic, he replied “the consumer.”
Admittedly, Riccadonna and Hopper are going up against some big guns…namely Lagarde and Gross.
- Just yesterday, IMF Managing Director Christine Lagarde announced the fund’s third lowered assessment of U.S. economic growth in less than a year.
- Pimco's Bill Gross has notably downshifted his own outlook, from “New Normal” to “New Neutral.”
What strikes us as important, and clearly Team Deutsche Bank agrees, is that even Lagarde expects that U.S. growth will accelerate in 2015 to three percent from the current lowered assessment of two percent. Riccadonna argues this acceleration will become apparent in the data over the summer, and that the Fed will have to change the wording in its communique at the October meeting.
As a result, he’s telling clients to brace for a very quick move to four percent for the U.S. 10-year note.