MNI: Fed: Policy Well Positioned To Respond To Risks

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Fed vs BOE communication

MARKET INSIGHT
  • The market is convinced that the Fed will increase the pace of tapering at its meeting this week. So much so that it's not really the primary talking point of the meeting - arguably the dots are getting more air time. The market's near-certainty on the faster taper pace began following comments by Chair Powell at his testimony. His comments have since been backed up by other Fed speakers.
  • The last time markets were this convinced of a policy action by a G4 central bank was in November when the Bank of England was widely expected to hike rates. Indeed, ahead of the November meeting there were more market participants discussing the size of the hike than debating whether a hike would actually be announced. Of course, we all know that the BOE failed to hike with many in the markets viewing the BOE's communication in the runup to the meeting as pretty misguided, and we of course saw the violent market reactions on the back of the November MPC meeting. Communications, particularly from Governor Bailey, are now viewed by market participants with a much larger handful of salt.
  • The November FOMC meeting, in contrast, saw very little market reaction as communications ahead of the meeting had been much clearer over the near-term objectives and reaction function.
  • It seems a fairly nailed-on expectation that the Fed will increase the pace of tapering today, but if that is not the case, the Fed's communications strategy to the market could be damaged in a similar way to the BOE's strategy.
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