Hawk or dove?
Recent Fed minutes indicate that there will almost certainly be a hike at the March meeting - given that, Chairman Powell may need to add some aggressive testimony to stamp his hawkish credentials
First day dilemma
It's your first day in a new job as manager and everyone is looking to see how you are going to behave compared to the old, now departed boss. At heart, you are just as mild-mannered as the previous incumbent. But you don't want your staff to start taking advantage - loitering around the water cooler, looking at pictures of kittens on the internet instead of working, sneaking off early with pockets full of stationery. So in your first week, you come down hard on all those acts of slackness, generate a quick sense of credibility that you are not to be messed with, and as the new work norms take hold, you gradually lighten up. and let the inner "dove" emerge.
Is this how Chairman Powell will behave? In truth, I have no idea, and it is his monetary policy stance I care about, not his domestic management style. There is, however, plenty of economic literature to suggest that this would not be a bad way to proceed - for those with a nerdy leaning, the seminal article on this can be found here, in Robert Barro's article.
Fed already sounding gung-ho
But with the latest Fed minutes showing members generally very upbeat on growth, and giving the economy the benefit of the doubt on wages and inflation, merely hiking rates at the Fed's next meeting on March 22nd may not be viewed as a particularly hawkish act - indeed, to stamp his authority, Powell may need to ratchet up the rhetoric on the pace of Fed tightening, and the scale of tightening likely for 2019 too.
And thereby lies the problem. Because if there is anything that is likely to generate more volatility in equity markets, and indeed, in bond markets, it is thoughts of a more aggressive Fed. US equities were soft again yesterday, bond yields higher and the dollar a little stronger too. But Asian markets may push back against this today, on China's markets first day back from the Lunar New Year holiday.
Whilst very little is clear in financial markets, one thing that does seem crystal clear today is that currently, stocks are not sufficiently weak for the Fed to hold off from hiking in March. The S&P500 is still more than 1% higher than it was at the start of the year. Unless such markets are in disorderly retreat, then this view is unlikely to change.
"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).