The Fed's dove-tinted glasses
After the no-show tapering shocker, we run the risk of excessive dovishness in Fedspeak.
It’s not that the message has become overly dovish but simply the fact that in our quest to explain the surprise last week we will have lost some objectivity in deciphering the Fed.
After last week’s comment from Bullard that October is a live meeting we now have the doves coming through in the form of Dudley and Lockhart helping to cement the view that the bar for tapering is higher than we thought.
While we ponder over the merits of an October taper vs a December taper, we must also not rule out the possibility that the Fed might not even taper this year.
If the budget battle in Washington is going to be fierce then it’s not only the release of the September employment report that could get delayed but trying to read the economic tea leaves will become more difficult.
There are plenty more Fed speakers to digest during the week but we run the risk of looking at each with a more dovishly than usual. It is going to take sometime to build an accurate picture of the Fed’s reaction function and the tapering and eventual rate path timetable.
While bond yields (and likely mortgage rates) are moving in the right direction for the Fed the attention will increasingly turn how much of a battle there will be over the budget/debt-ceiling in Washington.
The pendulum has swung away from tapering but the risk remains that it will swing the other way, with tapering expectations pushed out into early 2014.