Fed President Hoenig Speaks In Kansas City, USD Snapping Back
Yesterday afternoon Kansas City Fed President Tom Hoenig spoke to the CFA chapter here in town. The main message is we have at least, at least a year of very easy monetary policy ahead of us. My interpretation of the his comments below: the Fed is still more concerned about deflation risk than inflation risk and will be for a while. Although well-groomed in Fed speak these are the highlights from the meeting:
- “All recoveries are fragile [until they get stronger]” – Seemed to be a message of don’t despair. I know the waiting is painful, but the recovery will happen.
- Chief monetary policy tip – (not a direct quote) The Fed won’t be raising the target Fed Funds rate until well into next year because it will be buying MBS in the market for a number of months yet. Doesn’t make sense to try and increase credit by buying MBS and decrease credit at the same time by allowing Fed Funds to rise. Encouraging that that seems a little schizophrenic, even for the government. So don’t look for ANY FOMC action on short term rates before, say, March or April.
- President Hoenig thought it “would take at least a year for the Fed even to get to an accommodative monetary policy.” Money is loose now and if a “normal”, accommodative rate for Fed Funds is 2% to 2.5%, it is going to take quite a while to get there. Just shows you how panicked about the economy and the market reaction professional money managers are when they hyperventilate about the prospect of Fed Funds going from 0% to 1%. There were quite a few related questions and discussions around this point.
- The Tenth Federal Reserve District does have a “significant” banking problem in commercial real estate
- When asked if he thought the national CRE problems were severe enough to trigger deflationary forces, Hoenig said he didn’t think so. He pointed to the Core CPI number still being positive 1.5% or so.
- Interesting that he choose the Core CPI because back in 2000, Greenspan told Congress that the Fed’s preferred inflation measure was the ”chain-type price index for personal consumption expenditures,” ie, the PCE deflator. And that year over year rate of change IS (and has been for four months since May) quite negative now, down 0.5% in the August reading.
What does all this mean? Despite the fact that the dollar is stronger today, look for more USD weakness over the next few months. The USD is oversold and a snapback could be sharp and sudden, indicating we may well have a equity market (including emerging markets) correction soon, especially as it seems that investors are now worried about Q4 growth and a weak Christmas. The dollar rallies when risk aversion creeps back into investor psychology, as it is now. For evidence of that take a look at the A$, Yen (AUDJPY) crossrate. It has weakened some and will weaken more.
