A Hawk Stays Grounded, Not Flying High Yet: Trading Charles Plosser's Comments

Philadelphia Federal Reserve Bank President Charles Plosser said that despite the weak May nonfarm payrolls report on Friday, this does not change the view that monetary policy could be tightened at the end of the year. In other words, do not expect a QE3, at least for now. Plosser, who is a voting member this year, said that he thinks the U.S. is still in a gradual recovery, and his view has not changed on anything in the short term. In comments obtained by Reuters, Plosser, speaking to a group of reports in Helsinki, Finland said, "Certainly, the employment numbers that came out in the United States on Friday were disappointing... But I'm not seeing anything fundamental has changed in my view of the medium term outlook." Plosser said it was possible that tighter monetary policy could be enacted by the end of the year, but that it was data dependent. On Friday, just 54,000 jobs were created during the month of May, compared to expectations of 173,000. In addition to the weak jobs report, recent economic data such as ISM manufacturing, factory orders, and productivity have come in weaker than expected, leading some to say that we are in line for a double dip recession. Plosser said it was still to early to say whether QE2 has had the desired effect, and all but ruled out QE3. "The hurdle rate for doing more is very high," Plosser said regarding a third round of quantitative easing. Plosser said he was also concerned about the public's mood swings regarding inflation and deflation. Plosser is increasingly troubled by the volatility of the mood swings. "It is troubling that the public's inflation concerns can be so volatile," he said. "It suggests that there may be less confidence in the credibility of the Fed's commitment to price stability than we might desire," Plosser said. So how should traders interpret and play Plosser's comments? Plosser is a well known inflation hawk and these comments are nothing new from him, essentially the status quo. It remains to be seen whether a third round of quantitative easing will be enacted, but if economic data does not worsen drastically, it seems like traders should not bet on it. If they believe that a "QE3" is increasingly being built into the markets, then perhaps shorting high beta names may be a profitable trade, should QE3 not come to fruition. Names like Freeport McMoran Copper & Gold FCX, iShares Silver ETF SLV and Barrick Gold ABX would likely see downside pressure if there is no QE3. Conversely, if there is a QE3, names like this would benefit more than others if there is a QE3. For now, the hawk is staying grounded, and saying no more. Let us see how things look in August.