“The Fed Is About To Make A Massive Mistake” Saxobank’s Jakobsen Warns

Steen Jakobsen, chief economist and CIO of Saxo Bank, says the US Federal Reserve is on the verge of making a mistake about its projected rate hikes. The Fed has given itself the option of hiking interest rates at its June meeting; but Jakobsen says he is sceptical about the proposals, arguing that the Fed is taking the recent improvement in US economic data as an uptick in overall momentum. Jakobsen says the economy is still performing significantly below its potential, but thinks the Fed wants to hike interest rates now so it can lower them at a later date.

“Data releases that are close to our expectations have little additional impact on the forecast, while data releases that deviate significantly from our expectations can lead to more         significant revisions of the forecast,” adding that “It is, therefore, important for market participants and households to be able to follow the data along with the FOMC and to understand how we are likely to interpret and react to incoming data.”

CESIUSD – the Surprise Index is almost perfectly mean-reverting around zero. This is an issue because right now… it’s at a low.. meaning even without doing great, the US economy has a very good chance of improving relative to expectations……!!!!! I.e.: Not to true picture of overall economy but vis-à-vis present situation…..

Source: Bloomberg

Bloomberg has its own similar index, the ECSURPUS – it does not look very different.

Source: Bloomberg   

The “positive” being Atlanta Fed GDPNow forecast which has increased. But it often comes down hard as a quarter grows old (look at March drop for Q1).

Source: Bloomberg 

Finally, Fed NYnow cast is less “impressive so far..” 

Conclusion

I still think the Fed is about to make a massive mistake taking mean-reverting improving data as a precursor for net change in overall momentum – while what is really happening is that the US economy is improving from recession-bound growth (and productivity) to less than escape velocity.

I firmly believe the Fed’s hawkish tilt will be almost as short as the July/August 2015 announced hike in September 2015.

Fading the Fed is still overall the game, but as above, indicates there is a risk that the Fed will be desperate to continue normalization, making June a likely date for a July hike.