"It Was A Surprise To Us" – Yellen Reveals How Trump’s Fiscal Stimulus May Have Doomed The Stock Rally
By Tyler Durden
“Some of the participants, but not all of the participants, did incorporate some assumption of a change in fiscal policy into their projections. And that may have been a factor that was one of several that occasioned these shifts. But I want to emphasize that the shifts that you see here are really very tiny.”
– Janet Yellen, December 14, 2016 press conference
Ahead of today’s Fed meeting, the Wall Street consensus was that no matter what Janet Yellen said, whether it was a dovish, neutral or hawkish hike, the market reaction would be positive – just look at Torsten Slok’s prediction from yesterday. It was disappointed.
Why? For two main reasons.
As SocGen’s Omair Sharif explains in a post-FOMC note, the Fed spent most of the year revising down its rate projections, coming into the year anticipating four hikes, only to see those projections upended by market and economic events. By September, three officials saw no hikes this year, up from just one in June. Meanwhile, the market-implied probability of a December hike was only around 60% after the September meeting, with market participants debating whether or not the Fed could even hike this year. However, since that meeting, the data flow was supportive of a hike, and Fed officials expressed growing comfort with achieving their dual mandate. That led to the December hike becoming fully priced in, and today the Fed delivered, as expected.
As such, the hike itself was an anticlimactic event.
However, as we previewed repeatedly over the day, the most pressing issue for market participants was whether or not officials would revise their rate projections for 2017 and beyond.
Key question: how many hikes in 2017
— zerohedge (@zerohedge) December 14, 2016
This is where SocGen, and many others, admit they were “surprised” by the Fed adding an extra hike in 2017, with the median dot now showing three hikes next year versus two in September.
In her press conference, Chair Yellen noted that only some participants changed their outlook for rates in 2017, but it was enough to move the needle on the median. She also indicated that those who moved their rate hike projections higher weighed several factors, including a somewhat lower unemployment rate in the December projections than in September, somewhat higher inflation than previously projected, and she also stated that “some did incorporate some assumption of a change in fiscal policy, and that may have been a factor…”
Adding to the confusion, SocGen notes that given that a number of Fed speakers post-election indicated that they would not change their forward-looking views until they actually saw what fiscal policies would be implemented, this too “was is a surprise to us.”
It gets more interesting.
Yellen was also asked several times about fiscal policy, but she largely avoided discussing how monetary policy might react to changes in fiscal policy. One reporter asked her why she sounded a note of caution on fiscal policy in her recent JEC testimony when she and Bernanke had …read more
