FOMC minutes are out Tuesday afternoon and we’ll be at the ready for signals of an exit strategy for the Fed.
In a short note out in advance of their release, Morgan Stanley adds its name to those warning a “tightening moment” for equities (in this case European) will likely come way before a Fed rate hike.
It cites three reasons.
First, unlike in recent “tightening cycles”, the Fed is expected to move after the ECB and the BoE, thus dampening a rate hike’s impact on European equities. We wouldn’t overplay this, especially with the variety of exit tools it can use to try and set expectations, but it’s a useful historical reminder nonetheless.
Second, there’s the language: according to MS, changes in the FOMC minutes’ language can mean more for European stocks than a rate hike itself:
Frankly, we’re not sure what to make of that chart — it’s choppy for the 12 months following the FOMC language change — but we’ll still be on the lookout for changes to the phrases “exceptionally low” and “extended period”, even though it’s highly unlikely there will be any such signal today.
Third, the assumed end of QE2 in June. Interestingly, MS doesn’t see this priced in yet:
The Fed has said it will end QE2 at the end of June. This would certainly represent the “end of easing”, if not a stepping-stone to the “start of tightening”. Moreover, recent comments from Fed Governor Bullard hinted at apossible premature end to QE2. Further steps in an exit strategy could include some of the following: not reinvesting maturing MBS, conducting term deposits and reverse repos to shrink the balance sheet, raise the interest paid on reserves, selling assets. Given it is so well flagged, isn’t it likely that the end of QE2 is in the price? We think perhaps not, given the number of questions we continue to get on the likelihood of QE3.
We’re not quite sure what “the price” is at this point but the questions will no doubt pick up if Mr Trichet delivers as expected on Thursday.
Full note in the usual place.
Related links:
An exit strategy for the Fed – FT Alphaville
The fight over interest on reserves – FT Alphaville
Being Ben Bernanke – FT Alphaville
QE2 coverage – FT Alphaville