Fed trying to be transparent to markets as much as possible

Try typing the word 'dictionary' into a search engine and you will be amazed the number of results that get thrown up: 265 million is what I got! There are the usual Webster and Cambridge dictionaries, but also a reverse dictionary and a rhyme dictionary, as well as a biographical dictionary. However, if like me you work in the financial markets, the one dictionary we could all really do with is 'The Fed Dictionary'.

I for one would really like to have a manual that I can look up to decipher the true meaning of what the Fed is saying. Pick up any financial newspaper after a Fed meeting and you are likely to get varied interpretations from analysts as to what the Fed is thinking. What is scary is the fact that at times these interpretations are diametrically opposite. The minutes of the Fed's December meeting on interest rates were no exception to the rule. While some market participants have interpreted the minutes to reveal that the Fed is close to the end of its 18-month rate hike cycle, others feel that the Fed could continue to hike rates all the way to 5.50 per cent (currently the Fed Fund rate is 4.25 per cent).

The minutes stated, "given the information now in hand, the number of additional firming steps required probably would not be large". So what is 'not too large', is it 25bps or 50bps? The minutes also revealed that the Fed needed to be mindful of the possibility of further increases in resource utilisation and pressure on prices. Does this mean that if capacity utilisation continues to surge and unemployment rate continues to fall, the Fed could keep up with its measured rate hikes for some time to come?

I guess the Fed is trying to be as transparent to the market as possible. The unfortunate reality is that in today's truly global financial world, numerous factors influence the state of the US economy and hence monetary policy and therefore what the future holds can be rather murky even for the governors of the Federal Reserve. In such an environment predicting where rates are likely to be 12 months down the line is tricky at best.

Currently, the market is pricing in close to a 100 per cent probability of a 25bps rate hike when the Fed meets on January 31 and a 55 per cent probability of another 25bps hike at March 28 meeting. Beyond that, as the Fed would say "all depends on economic data".

The foreign exchange markets appear to have taken their cue from the interest rate market and are focusing on the possibility that a peak in rates could be near at hand. In the financial markets since perception is half the battle, the dollar has started the year taking a beating as it loses its increasing yield advantage. Add to this expectations of a rate hike by the European Central Bank and comments from Chinese officials that they plan to explore ways of investing their reserves more efficiently and you have the perfect recipe for a euro rally.

Needless to say, when the value of the dollar falls, assets priced in dollars appear attractive and that is one reason why gold has surged to a new 25-year high above $550.

Gold is also a hedge against inflation and herein lies my dilemma.

The Fed appears to be tom-toming the fact that long-term inflation expectations are well contained and reflected in the flat US yield curve, but gold is rallying!

I guess the best thing to do is take things one at a time rather than trying to predict the unknown because in doing so one could end up feeling rather baffled, befuddled, bewildered, disconcerted, flummoxed, nonplussed and stumped. All synonyms for the word "confused".

- The writer is Regional Head of Sales, HSBC Global Markets, Middle East. The views expressed herein are his own and not necessarily those of his employer.