By Damien Boey at Credit Suisse:
Over the past few days, we have witnessed some very confusing signals from Fed officials:
- Vice Chair Clarida suggested that the Fed should not wait until things get so bad to have a dramatic series of rate cuts. These comments followed and potentially reinforced dovish comments from the New York Fed’s Williams (below).
- Williams delivered a speech about monetary policy near the zero lower bound. He suggested that when a central bank has limited stimulus to use, it pays to act quickly to lower rates at the first sign of economic distress.
- A New York Fed spokesperson later clarified that William’s prepared remarks were an academic speech on 20 years of research. They were not about potential policy actions at the upcoming Fed meeting. For the New York Fed to take such an extraordinary step heading into a black out period was a testament to the confusion caused by the various Fed comments.
In response to comments from Clarida and Williams, the front end of the curve rallied strongly. At one point the market was pricing in a 70%+ chance of a 50bps cut at the end-July meeting. But since the clarification from the New York Fed about William’s comments, the market has pared back the likelihood of a 50bps cut, settling instead for only 25bps cut with a high degree of certainty.