Bank of America/Merrill Lynch (bolding mine):

  • Minutes of the March 17-18 FOMC meeting were fairly neutral relative to market expectations judged by the lack of market reaction
  • The more market relevant commentary from the Fed continues to originate from New York Fed President Dudley

(ps. Adam had the headlines from Dudley, here)

  • Instead of focusing on the precise date for liftoff Dudley continues to address his views on the much more important question of the path for rate hikes after liftoff
  • Rather than the specific path he emphasizes its dependency on financial market conditions
  • Dudley clearly does not want stocks to decline a lot, he also wants to avoid meaningful increases. In other words, for the coming rate hiking cycle he wants a "Yellen Collar", not a "Yellen Put". While prior to the financial crisis it was a Fed put, given the policy mistake represented by the 2004 rate hiking cycle - where financial market conditions did not tighten, in fact they loosened significantly contributing to the housing bubble and the financial crisis - Dudley now argues for a Fed Collar.
  • Also very apparent is that Dudley wants bond prices to go down - not a lot but clearly down. Should the Fed start hiking rates this summer/fall - which we expect - and if Dudley's thoughts are shared more broadly by the FOMC it would appear that we should prepare for this year not being a good one for total returns. We maintain a 0% total return forecast for high grade in 2015