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Fed will need to continue hawkish talk to convince markets - Goldman Sachs

Goldman Sachs on the fallout from the hawkish FOMC minutes

Price action post the release of April's hawkish FOMC minutes last Wednesday, however, does suggest that commentary from the Fed and Fed officials is currently the more dominant variable in the market's reaction function , which is understandable given the large gap between the market's and Fed's path for the funds rate. While the market has substantially repriced an increased probability of a Fed funds hike in the upcoming meetings, there is a still a significant distance to be covered for it to be in sync with the Fed's dot-plot for the rest of 2016. This implies that 'expensive' bonds are clearly vulnerable to a repricing higher and it is highly likely that a rate 'shock' emanating in the US would also impact the term structures in other G-4 markets.

While actions speak louder than words, for the Fed to be able
to act in the June meeting, their words will need to do a fair
amount of the work beforehand in order to increase the
market-implied odds, unless of course they are willing to break
convention.

Against this backdrop, Chair Yellen's speech on June 6 will be a key market event.It will be interesting to see if she supports the recent hawkish stance of her colleagues and April Minutes or maintains her cautious stance as in her speech to the Economic Club of New York in late March. While actions speak louder than words, for the Fed to be able to act in the June meeting, their words will need to do a fair amount of the work beforehand in order to increase the market-implied odds, unless of course they are willing to break convention.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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