FOMC today and the ‘transitory’ effects of lower oil

–From last FOMC statement: “…the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.”  A few points: the decline in energy prices no longer appears transitory.  The dollar is making new highs against many currencies, so import prices are likely to remain pressured.  The labor market already supports a hike.  The inflation picture isn’t doesn’t.  I am including a chart of BAML US High Yield Master II; for the third time since 2013 the effective yield has pierced 7%.  Some credit conditions are already tightening, and likely not just for the energy sector.

–Former Dallas Fed head Richard Fisher was on tv yesterday arguing that the Fed’s job is to focus on domestic concerns, with the implication that the Fed should tighten now and ignore some of the noise in non-US markets.  Maybe he’ll become President Trump’s Treasury Sec’y.  The other Fischer, perhaps the most important member of the Fed, has also argued that the current rate structure is not normal and should be raised.  Yes, rates are too low.  But the world is not normal and there is an overhang of bad debt globally, highlighted by Greece, Puerto Rico, pension obligations.  Feels like we need the forest fire of creditor losses to clear the landscape and allow for new growth down the line.
–So what does the Fed do?  Punt.  Which will likely put some fairly heavy weight on the next two payroll reports.

Posted on July 29, 2015 at 5:18 am by alexmanzara · Permalink
In: Eurodollar Options

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