By Hans Parisis From Newsmax

The FOMC’s statement (as well as its economic and policy path projections) and Fed Chair Janet Yellen’s press conference have the potential of moving markets.

It has been interesting to see how since the March policy path expectations markets have showed a more dovish stance than even the FOMC’s so-called “fifth dot” expectations.

By using the dovish “fifth dot” approach, we see in March Fed funds rates were expected in the 2.50 to 2.75 percent zone by the end of 2017, while markets, by using the overnight indexed swap (OIS) for overnight unsecured lending between banks (the federal funds rate), we see expectations in the 2 percent zone.

I admit this is somewhat complicated, but important enough for being taking into account because markets’ expectations don’t seem to discard some form of “secular stagnation” taking hold in the not so far future, which explains their more dovish expectations.

I’d like to add here and with what we know at present it’s difficult to support the secular stagnation hypothesis that, we should not forget, would be driven by permanently lower potential growth in the U.S., which I can’t clearly detect at present, and as is demonstrated in:

The Goldman Sachs’ US-MAP surprise index, also known as a Macro-data Assessment Platform, who tracks up/downside macroeconomic “surprises” relative to expectations,
The Citigroup Surprise Index

Which both have turned nicely higher since the April 28-29 FOMC meeting

It will be interesting to see if we will get a better view on where the Fed is heading, especially taking into account what Yellen said in May: “… if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy. To support taking this step, however, I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term…”

Let’s keep it simple. The Fed meeting will be mostly about the FOMC downgrading, yes-or-no, its March “dots.”

There is of course the endless Greek nightmare, where the Bank of Greece has warned

“… Failure to reach an agreement would, on the contrary, mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country’s exit from the euro area and — most likely — from the European Union … outflow of deposits (amounting to some 30 billion euros in the period October 2014-April 2015) …”

By the way, bank deposits are now back at their levels of 2004!

You don’t have to be a pessimist to admit chances for a temporary, which never can be a good solution, diminish by the minute.

It remains interesting how markets still don’t seem calculating in the consequences of the losses that would be inflicted to the “sovereigns” that at present hold about two-thirds of Greek debt (324 billion euros or $365 billion) in case Greece goes bankrupt.

Under that scenario, Germany is at risk of a loss of about 58 billion euros ($65 billion), but what only very few take into account is that Italy, in case Greece goes bust, is at risk to see its expected debt growth in 2015 doubling to 75 billion euros ($84 billion), which should have dramatic consequences as the country is expected to grow barely by 0.7 percent this year.

Yes, this could open Pandora’s Box.

I don’t think it’s unreasonable to fear that Greece could default and that by itself could cause a GREXIT.

And if that were to occur, we could expect the ECB to do “whatever it takes” and apply further extraordinary measures to limit the impact on the other euro area member states.

If that were to happen, we should see the euro going substantially lower.

Yes, we are very close to entering uncharted waters.

Investors could do well being prepared for the “unthinkable.”

For more on this story go to: http://www.newsmax.com/Finance/HansParisis/federal-reserve-janet-yellen-economy-greece/2015/06/17/id/650924/#ixzz3dR1YTTWG

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