22/3/18: The Fed is boldly going where it was going before

My article on yesterday's Fed meeting is now up on Business Post page: https://www.businesspost.ie/opinion/fed-boldly-going-going-412191.

And a handy chart from Bloomberg on the relative size of the U.S. Fed's balancesheet, compared to other major Central Banks:

My key takeaway from the Fed meeting:

On the net, the Fed opted to continue underwriting the complete lack of fiscal discipline sweeping Washington these days. Since taking office, the current Presidential Administration has embarked on two major fiscal stimuli, involving the Tax Cuts and Jobs Act 2017 and the Government funding agreement that was delivered to the Congress late Wednesday night. The latter amounts to $1.3 trillion of new spending, $700 billion of which will flow to Pentagon. The new Bill will push projected 2018 U.S. fiscal deficit beyond $1 trillion mark, up on $665 billion last year. In January, President Trump has promised a third stimulus - the proposed $1.5 trillion infrastructure development plan - to be delivered later this year. By committing to continue slow deleveraging of the Fed’s  $4.4 trillion balance sheet, and by holding steady on small-step rates increases through 2018, Powell is de facto sustaining financing support for the swelling Federal deficits.

With calm and poise, the Fed’s new Chairman delivered no surprises, no dramas, a little dose of bitter medicine, and a lot of hopes. Unsurprisingly, dollar fell back 0.77 percent against the basket of major currencies, stocks slipped by less than 0.2 percent, and yields ended the day lower, following some volatile trading, while the yield curve flattened in the wake of the Fed’s decision. Like the FOMC projections for economic growth, the markets’ reaction to the Fed’s musings lacked conviction.

15/4/17: Thick Mud of Inflationary Expectations

The fortunes of U.S. and euro area inflation expectations are changing and changing fast. I recently wrote about the need for taking a more defensive stance in structuring investors' portfolios when it comes to dealing with potential inflation risk (see the post linked here), and I also noted the continued build up in inflationary momentum in the case of euro area (see the post linked here).

Of course, the current momentum comes off the weak levels of inflation, so the monetary policy remains largely cautious for the U.S. Fed and accommodative for the ECB:

More to the point, long term expectations with respect to inflation remain still below 1.7-1.8 percent for the euro area, despite rising above 2 percent for the U.S. And the dynamics of expectations are trending down:

In fact, last week, the Fed's consumer survey showed U.S. consumers expecting 2.7% inflation compared to 3% in last month's survey, for both one-year-ahead and three-years-ahead expectations. But to complicate the matters:

• Euro area counterpart survey, released at the end of March, showed european households' inflationary expectations surging to a four-year high and actual inflation exceeding the ECB's 2 percent target for the first time (February reading came in at 2.1 percent, although the number was primarily driven by a jump in energy prices), and
• In the U.S. survey, median inflation uncertainty (a reflection of the uncertainty regarding future inflation outcomes) declined at the one-year but increased at the three-year ahead horizon.

Confused? When it comes to inflationary pressures forward, things appear to be relatively subdued in the shorter term in the U.S. and much more subdued in the euro area. Except for one small matter at hand: as the chart above illustrates, a swing from 1.72 percent to above 2.35 percent for the U.S. inflation forward expectations by markets participants can take just a month in the uncertain and volatile markets when ambiguity around the underlying economic and policy fundamentals increases. Inflation expectations dynamics are almost as volatile in the euro area.

Which, in simple terms, means three things:

1. From 'academic' point of view, we are in the world of uncertainty when it comes to inflationary pressures, not in the world of risk, which suggests that 'business as usual' for investors in terms of expecting moderate inflation and monetary accommodation to continue should be avoided;
2. From immediate investor perspective: don't panic, yet; and 
3. From more passive investor point of view: be prepared not to panic when everyone else starts panicking at last.