“Oh, what a tangled web the Fed weaves when first they practice to perceive, a neutral rate that is just make-believe.”  Fed Chair Jerome Powell created a schlitt storm at the end of November when his description of Fed Funds went from “being a long way” from neutral to describing them as “just below” neutral.  He did it again after the Fed hiked rates at the December 21 FOMC meeting when he insisted gradual increases were still needed, while seemingly oblivious to recent equity market carnage.   All that drama disappeared following the January 30 FOMC meeting.

Mr Powell’s started back-tracking on January 4 after a fresh round of equity market carnage. Since then, markets expected a somewhat dovish FOMC statement on January 30.  They got it, and then some.  The FOMC left interest rates unchanged, which was almost universally expected and issued a dovish statement.  The “Committee” no longer believes “that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.”  Instead, they preached “patience.”   The statement read: “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”  Markets read: “No rate hikes any time soon.”

Mr Powell’s explained his “flip-flop” between December 21 and January 4 in his press conference.  First, he described the US economy as being in a “good place,” citing the unemployment rate near historic lows, stronger wage gains and inflation near the Feds 2.0% goal, as proof. Then he blamed cross-currents for conflicting signals about the outlook. He pointed to slowing growth in China and Europe, ongoing trade negotiations, and elevated uncertainty around government policy issues including Brexit and the partial shutdown of the US government.

Traders who may have gotten smoked by Mr Powell’s flip-flop between December 21 and January 4, are cross and scratching their heads.  The crosscurrents identified by Mr Powell on January 30 were major issues for at least the previous six months, and they were discussed at the December meeting.

In the minutes from that meeting “participants commented on a number of risks associated with their outlook.”  They included “the possibilities of a sharper-than-expected slowdown in global economic growth, a more rapid waning of fiscal stimulus, an escalation in trade tensions, a further tightening of financial conditions, or greater-than-anticipated negative effects from the monetary policy tightening to date.”

Someone got their wires crossed and Mr Powell’s dovish performance at his January 30 press conference, suggests it was him.

But by the end of the day on January 30, all was forgiven, at least from Wall Street’s perspective. The “Powell Pause” powered the Dow Jones Industrial Average 434 points higher, fully erasing the post-December FOMC meeting losses.

Mr Powell isn’t the only person getting his wires crossed.  UK Prime Minister Theresa May suffered from the same malaise. CNN reported that she told the House of Commons on January 15, her first Brexit Plan was the only plan that would deliver the Brexit the British people voted for in 2016. The Members of Parliament didn’t agree. She suffered a crushing defeat in the vote.  She tried again on January 29 and this time was successful, sort of. Ms May ended up with a mandate to renegotiate the Irish backstop portion of the deal.  The European Union replied that the deal is not negotiable.   Their opposition suggests a rising risk that the UK leaves the European Union on March 29 without a deal. Still, its politics and anything can happen.  It also means that currency markets will continue to be vulnerable to bouts of Sterling-based volatility.

The FOMC meeting energized FX markets.  USDCAD blasted through the bottom of its  January trading range of 1.3180-1.3380 and set the stage for further losses in the coming weeks.  But it won’t be a one-way street.  Bank of Canada (BoC) Governor Stephen Poloz beat Mr Powell to the dovish bandwagon by nearly three weeks.  He didn’t blame cross-currents for his stance but blamed concerns about weak oil prices and a soft housing market.  Oil prices may turn Mr Poloz back to hawkish a lot quicker than the Fed.  West Texas Intermediate (WTI) oil prices have climbed 9.0% since the January 9 meeting.  In November, domestic GDP growth shrank 0.1% which was expected.  GDP was hampered by the postal strike, and it followed the consensus-beating October data.  The result was not much of a Canadian dollar negative. Continued US dollar selling pressures from the Fed decision, equity market gains and bearish USDCAD technicals suggest there is further upside for the Canadian dollar. Mr Powell’s concerns about cross currents managed to uncross his wires and the subsequent Wall Street rally put a smile on formerly cross traders “