Federal Reserve likely to disappoint policy doves -Weeden strategist
By Michael Connor
NEW YORK, March 19 (Reuters) - Dovish investors are going to
be disappointed by the Federal Reserve's policy-setting open
market committee who are meeting now and should hedge against
policy outcomes likely to rattle global markets, Weeden & Co.
derivatives strategist Michael Purves said on Tuesday.
Purves told the Reuters Global Markets Forum chatroom that
expectations for interest-rate levels between policymakers and
markets were extraordinarily wide.
That gap carried the biggest risks of losses for investors
betting the Fed will soon resume rate cuts and balance-sheet
policies in place since 2008's financial crisis, Purves said.
The Fed will issue its decision and an accompanying statement on
Here are excerpts:
Question: What do you expect to hear from the Federal
Reserve on Wednesday?
Answer: Most agree that we will see the Fed lower its
rate-hike expectations and give some comforting language on the
balance sheet. But my question is whether the (messages) will be
skewed for the hawks or the doves? (Even) if the Fed lowered by
two hikes from December, that would still be north of where the
market is. So, to deliver a net dovish message, the Fed must
really deliver two hikes lower than December, (and) a strong
message on the balance sheet. ...It seems a big ask.
Q: Why do you think the Fed may surprise on the hawkish
A: One key factor is the Fed pivot – the heightened market
stress shown through VIX and higher credit spreads in Q4 – has
largely reversed. Further, breakeven inflation rates and
commodities have rallied substantially since the dark days of
December. So, if you look at the 10-year yield, you can see its
trajectory lower over the past several months has been solely
defined by rates-hike expectations, while ignoring other factors
such as inflation. Another factor is lower foreign sovereign
Q: Where would the current 10-year yield of 2.60 percent be
A: We could easily be above 2.80 percent and perhaps
trending towards 3.0 percent.
Q: What should investors do?
A: Buy some hedges for asset classes sensitive to a net
hawkish message tomorrow. For example, EM (emerging markets),
commodities, and even the overall market.
Q: Which things should investors watch Wednesday?
A: Fed funds and Eurodollars (money markets) are very
volatile and kind of manic depressive. They can swing. Keep an
eye on the 10-year Bund. It is extremely low. Be mindful of how
EM assets trade; they may in fact fight through a net hawkish
(Reporting By Michael Connor in New York
Editing by Susan Thomas)
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