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March 23, 2005
Not everyone is hung up on the word "measured"
The exchange market, for one, is not.
The changes in the statement raised the prospect of the Fed accelerating its current steady rate rises.
"It really raises the possibility of a 50 basis point hike down the road or higher rates than was previously thought," said Marshall Gittler, senior market strategist at Deutsche Securities in Tokyo.
It's looking like "measured" refers to the expectation, but the risk is higher. If things go sour, "measured" goes out the window--fast! I'm willing to go with that interpretation if the markets are. I think it's a better interpretation than the market had 24 hours ago. I'll sleep easier now.
The dollar was up, but...
High-yielding currencies that investors have favored in carry trades also took a bruising.
Ah... that would explain some of what's going on.
For more on carry trades, see this excellent post at macroblog.
Finally, we have this,
While the threat of faster inflation is usually bad for a currency, the Fed's promise to stamp out price pressures with higher rates helps lure foreign investors to short-term dollar deposits. Treasury bond yields at eight-month highs may also entice investors.
Right, and the market was more sanguine about this than I thought they would be. That's a good thing. Nice to be pleasantly surprised.
If you haven't guessed by now, the thing that still puzzles me the most about Tuesday's events is why the bond market reacted so suddenly, so negatively to news that was not really news. What motivated traders to hold on to the 10-year until 2:15pm EST yesterday? If "measured" isn't that significant, and if the Fed is committed to keeping inflation at bay, and if we all knew that price pressures are building based on previous information, why did they wait for the statement to move?
Maybe all those leveraged carry trades started to unwind all of a sudden. Maybe the exchange market was more forward looking today than the bond market.
Maybe.
One thing I know for certain... it was a fascinating day in the financial markets. This is what I live for as an economist. What will the morning bring?
Posted by William Polley at March 23, 2005 1:04 AM
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