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Investors: Fed Appears 'Comfortable and Balanced' About Economy

Investors: Fed Appears 'Comfortable and Balanced' About Economy
(Dollar Photo Club)

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Thursday, 04 January 2018 08:35 AM Current | Bio | Archive

The FOMC minutes show a U.S. central bank that is comfortable and balanced.

Remember, the Fed does not see its role as being to reduce inflation, to reduce growth or to reduce pricing power during this tightening cycle. The Fed’s role in tightening is to trying to keep things very much as they are today.

The posibility of a March rate increase is evident in the language of the Fed minutes and 2 or 3 rate increases seem likely this year.

Maybe, it could be worth for investors to take note that the Fed minutes show uncertainties over the tax cuts.

FOMC members expressed growing confidence in the strength of the labor market and the economy but stated: “Participants discussed several risks that, if realized, could necessitate a steeper path of increases in the benchmark federal-funds rate …. These risks included the possibility that inflation pressures could build unduly … perhaps owing to fiscal stimulus or accommodative financial-market conditions.”

Now, it’s a fact that markets are biased to underestimate the Fed because markets pay most attention to initial data releases, whereas the Fed pays attention to revised data.

As data are normally revised higher at the moment, the Fed’s economic backdrop is in fact more positive than that, which most investors are assuming.

Does that mean that markets will react negatively to more rate hikes?

The short end of the bond market could be presumed to react, but for risk assets, the consequences of a Fed acting to maintain stability are very different from a Fed seeking to squeeze inflation from the system.

The St. Louis Fed President James will be speaking today.

Today we got the final Eurozone PMI opinion poll, not hard economic data that show that Eurozone economic growth is at its highest level since early-2011 with the final Eurozone composite output index coming in at 58.1 (Flash: 58.0, November Final: 57.5) and the final Eurozone services business activity index coming in at 56.6 (Flash: 56.5, November Final: 56.2)

The relentless torrent of PMI data is actually part of the point what economists call “frequency bias.” Never mind to the quality, look at the quantity. Markets and media pay attention because there is a lot of noise to pay attention to. Of course, this doesn’t mean it is useful noise.

Politics may offer somewhat distraction for markets today.

Iran’s Revolutionary Guards have been deployed to quell 'sedition' in protest hotbeds over there.

Politics in the Unites States could, I’m not saying “will,” come under the spotlight when Michael Wolff's “Fire and Fury,” comes out on January 9. Wolff is a longtime journalist who has written for Vanity Fair, the Guardian, the Hollywood Reporter and other publications.

It is announced to be a book with colorful anecdotes about the Trump campaign, but, and this is important for investors, its significance for markets is very low at the moment.

With the tax reform package passed, the level of President Trump’s political capital in Washington, but that is really not that important to financial markets. Only, if this started to affect expectations for the mid-term elections later this year, then there would be market significance.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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The Fed does not see its role as being to reduce inflation, to reduce growth or to reduce pricing power during this tightening cycle. The Fed’s role in tightening is to trying to keep things very much as they are today.
fed, comfortable, balanced, economy, investors
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2018-35-04
Thursday, 04 January 2018 08:35 AM
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