FOMC struggling to justify advance guidance

As Janet Yellen presides over her final FOMC meeting before being replaced by Jerome Powell, what she will be most remembered for, and perhaps criticized over is the level of advance guidance she has provided to markets.

The hike that is going to happen later today has been predicted since the summer and as the seasons have changed, the Fed’s determination to hike again this year hasn’t.

The inflation report for November will also be released later today although the Fed will have received notice. Core CPI is likely to have risen to 1.8%, still shy of the Administration’s target of 2% and this will concern the more dovish members of the FOMC who will want to see a switch to a more reactive approach going forward.

The dollar index has been hemmed in by technical levels at 92.50 and 94.40 for some time now and it is unlikely that today’s news will change that. Monetary policy is the main driver of the dollar now and it will become sensitive to changes in inflation and activity going forward which are going to be the only indicators of Fed. thinking as advance guidance leaves with Mrs Yellen.

Brexit rows rumble on

As predicted, the comments of David Davis the U.K. Brexit Minister over the agreement reached last week caused virtual uproar in Brussels. Guy Verhofstadt the senior member of the European Parliament and a former Belgian Prime Minister was forthright in his criticism, calling the U.K.’s exit strategy that of a toddler.

The row over whether the agreement is legally binding is of little consequence since that is unlikely ever to be tested following the change in the U.K.’s stance to be far more accommodating. However, it illustrates two things perfectly; first the level of antipathy that exists between the two sides despite Theresa May’s efforts to bridge the gap and second that the EU will stand its ground and offer no particularly advantageous terms over trade when the talks resume.

A U.S. think tank predicted yesterday that the U.K.’s trading position with every part of Europe will be harmed by Brexit.

Sterling continues to be buffeted from all sides although it remains in relatively narrow ranges. The outlook for the pound remains inextricably linked to Brexit although with the negotiations not slated to restart for a few months the political outlook could take centre stage with Theresa May harmed rather than helped by her intervention in the Brexit process.

FOMC, MPC, ECB then Christmas

The three G7 Central Bank meetings being held this week are each important their own way. I have already discussed the end of advance guidance and switch to a more reactive Fed which will be a major characteristic of Jerome Powell’s stewardship.

The MPC meeting tomorrow will be defined by the voting following last month’s hike and how Governor Mark Carney reacts to questions about how he sees the Brexit agreement affecting the economy.

His toughest question however will be over justifying the hike they voted for last month. This is another example of poor advance guidance as Carney painted himself into a corner by first blaming the fall in sterling for rising inflation then saying that interest rates needed to rise to counter it. In the six weeks since the hike the pound has performed reasonably well driven primarily by the Brexit agreement.

Finally, the ECB meeting tomorrow should self-congratulatory although there are beginning to be concerns that inflation may start to rise and this is one the ten “things to look out for in 2018”.

Over the next two weeks I will outline my entire list of ten macroeconomic, political and monetary policy issues that will drive markets in 2018.

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