WSJ Fedspeak

I enjoy reading “summary pieces” on what economists are thinking.  While they can be noticeably wrong (like when 80+% of them saw a rate hike in September), they do provide a glimpse into what a subset of the markets are thinking.  Call it my inner Sun Tzu wanting to know my enemy.  Last week, the WSJ did a survey of which FOMC members economists found the most and least useful to gauge Fed policy.  I found the results a little surprising, in that I would not have rated anyone outside of the Big 3 (Yellen, Fischer, Dudley) as highly as the economists had.  I’m not sure listening to most of the non-Big 3 Fed speakers would have been “useful” – especially over the past year.  And I am using the term “useful” in a very wide definition – including those who may be contrarian indicators.

 

More importantly, there are a few members that I would classify (currently) as “totally useless.”  I can’t remember the last time I saw Kocherlakota, Lacker or George on the speaker calendar and I felt the need to see the headlines right away.  I hate myself for even looking later on.

 

So who do I find useful?  I generally weight the Governors higher than the non-Dudley Bank Presidents.  Unfortunately, many of their speeches are on regulatory issues than economic conditions.  I suppose among the Bank Presidents, Rosengren, Lockhart, and Williams can be useful.  And I have some optimism that Kaplan will be useful, as his first comments seem reasonable.

 

Of course the more important gauge of Fed policy is what the markets are pricing in.  It’s been a while since we looked at what is being priced into the various meetings.  92% of economists think we get a Dec liftoff[1] and the markets are pricing in about 67%.  Of course, we are comparing apples to oranges, since the “92%” does not translate into “FF probabilities”.[2]

 

The trend we see in the FFs is that the quarterly meeting pricing (Dec, Mar, Jun, Sep) declines as you go further out the curve, while the non-quarterly meeting pricing (Jan, Apr, Jul, Oct) increases as you go further out.  This makes sense as the bias towards hiking at the quarterly meetings dissipates over time.  The main things that stick out to me are that:

  • Dec meeting should be higher. I’m not sure if we are going to see one of the “all other things being equal” scenarios: a collapse in economic data, a collapse in equities (a moderate drop is probably reasonable), a collapse in other financials, or the world falling apart.  It’s only 3.5 weeks to the Fed meeting and counting (and this Thanksgiving week will fly by) – that’s not a big window.
  • March/April meetings should be higher. I’m not suggesting the Fed will hike at both meetings – they will probably only hike at 1 of the two.  However, when yoy inflation pops, the picture just looks much different.  Oil also has indirect effects on core inflation as well.  Various economic models will reflect a higher inflation rate, all other things being equal.  While the Fed rhetoric has talked of gradual rate increases, the SEP will probably continue to show a bias towards 4 hikes a year.  This all points to a March hike after Dec.  I realize the data from the previous two winters has been very poor.  But you could probably argue that the seasonals should now compensate better for that.

 

As such, owning some kind of cheap put structure on EDH or EDJ makes sense.  Stay tuned.

[1] According to a WSJ poll on Nov 12.

[2] For example, 92% of economists may think there is a 51% chance of liftoff in Dec.  And for later meetings, we may get a noticeable chance of a non-25bp move priced, a chance of an ease, or supply-demand issues.