Is Fischer 'Stan the Man' or the 'Odd Stan Out' on Rate Hikes?
At Jackson Hole, Stan was the man.
Federal Reserve Chair Janet Yellen's long-awaited speech on Friday was interpreted by the markets as somewhat dovish on future interest rate hikes, with five-year real yields lower after investors digested her commentary. But shortly thereafter, Vice Chair Stanley Fischer indicated in his own remarks that a potential interest rate increase in September and a total of two hikes in 2016 were consistent with Yellen's published remarks, which helped fuel a sell-off in Treasuries.
"For the near-term rates path, the main driver last week was not Chair Yellen, but Vice Chair Fischer," writes Neil Dutta, head of U.S. economics at Renaissance Macro Research.
Among the voting members of Federal Open Market Committee, however, it seems Stan is more of the "odd man out," according to Jefferies LLC Chief Market Strategist David Zervos.
"There seems to be no other 'relevant' member of the FOMC that is pushing in [Fischer's] direction," he writes. "In fact, both [Atlanta Fed President Dennis] Lockhart and [St. Louis Fed President James] Bullard pushed back on the two-hike notion quite aggressively over the weekend."
As such, Morgan Stanley fixed income strategists led by Matthew Hornbach are advising traders not to fight the Fed, but to fight the Fischer and buy the dip in the five-year U.S. Treasury bond.
"We think the higher yields that resulted from the market reaction to Vice Chair Fischer's comments presented an opportunity to buy 5-year notes at better levels than what we earlier suggested," they write. "While August payrolls present an obvious risk, we continue to believe market-implied probabilities for a September rate hike will end at zero, not 100."
Analysts are now wondering whether Fischer, who was once seen as something of a "shadow" Fed Chair given his illustrious resume, has become somewhat removed from the consensus view at the central bank.
"This is not the first time this year that Stan Fischer has provided guidance meaningfully at odds with market pricing," said Dutta, pointing to the Vice Chair's assessment in January that four rate hikes this year were within reach. "Thus, we are reluctant to take much of a signal from his comments."
Dutta suggested that a stellar non-farm payrolls print on Friday in the neighborhood of the previous two reports would likely elicit a rate increase in September, thereby proving Fischer right in the end — but cautioned that this would be hard to come by.
"Fischer may have been speaking too cavalierly, or maybe he truly has moved away from the core," added Zervos. "I'm not sure exactly how to interpret his outlier statement, but for now I'm tempted to disregard it until I see other core members follow in his path."