Fed tightening expectations remain too low – BBH

Analysts at BBH note that Federal Reserve officials have been sounding cautious regarding further policy tightening.

Fed doves will end up eating their words

"This cautiousness was reflected in FOMC minutes.  The minutes show that "A majority of participants judged that one more increase in the target federal-funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted."  Some officials said the Fed’s focus "should shift from how high to raise the policy rate to how long to hold the policy rate at restrictive levels."  Lastly, "Participants generally judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the committee's goals had become more two-sided."  While the decision was seen as a hawkish hold cut to the unexpected shift in the Dot Plots, the minutes suggest a much more balanced view was taken at that meeting."

"That said, Fed tightening expectations remain too low.  If those expectations fell because higher US yields would do the heavy lifting, shouldn't those expectations rise now that yields have fallen sharply?  Yet they haven't as WIRP suggests odds of a hike November 1 still remain near 10% and rise to only 30% for December 13.  The market and the Fed can't have it both ways and we think the Fed doves will end up eating their words.  Once again, the market is very wrong about the Fed, as it's been this whole cycle.    The first Fed cut has been moved forward to June from July previously, which is also wrong."