What to expect from FOMC today?
Last night I have read a statement from Bernanke that I found in my documents, the statement from March 27./2012. I can tell, after three years we have a completely different figures from US, much better. Especially with the labor market, where unemployment fell from 8.3% to 5.3%. Bernanke have said then, that we need to wait the better figures in the economy and that the interest rates will depend on that figures, after wich they will consider to hike the same, maybe in late 2014. The jobs market is not the only one which is important for a decision like this one, there is housing market as well, inflation forcast and much more figures, but… Here we are in the March 2015. and all we can hear from FED meetings is always the same, the magic word ‘patient’. What could we hear today, possibly the same!?
In the last 10 months the US dollar has strengthened abnormal in the market and that could be the biggest problem for which the Fed could still leave rates on hold, with the magic word ‘patient’ in the main role. Further strengthening of the US dollar would only harm the recovery, the exporters already have a problem. On the other side, whether is eventualy droping the word ‘patient’ from Yellen statement included in the US dollar strenght? It could be. That’s why I am thinking about this. Only concrete and specific actions in tightening monetary policy could give the strong boost to US dollar, everything else could have a minor impact in the market. I expect from Yellen to stay on course until the next meeting in June. Dovish statement could help other curencies to recover, especially the euro. Let’s see!?
18:00 h (GMT) – FED Interest rate Decision, (previous 0,25%), FED’s Monetary Policy Statement.
18:30 h (GMT) – FED’s Monetary Policy Statement and Press Conference.
Everything I wrote was happen, from FOMC decision to the market reaction on the press and Yellen speach. 🙂
The FED has a huge dilemma and whilst the choices are simple, the ramifications are not. The basic choice is to include or exclude the word patience from the statement. It is fairly certain that rates will remain unaltered and if what has been recently said can be believed, it is not a reality.
To include the word patience will put off any rate rise until at least the July meeting and probably September at the earliest. To exclude the word patience will indicate that the FED is on track for a June rate hike.
The ramifications of including the word patience are that there will be massive Dollar selling with a potential test of the low of 1.0971 from 26th January 2015. There is score for a test of the high from 2nd February 2015 at 1.15338 though I do think that this is unlikely. I am of the opinion that inflation in the United States is on a knife edge. It has remained very benign despite the unprecedented quantitative easing. I think one of the major facts which have over the last year allowed it to remain contained is the strengthening of the Dollar. A sudden reversal in the strength of the Dollar could be the precipitating factor which suddenly sends inflation out of control and significantly above the 2% mark.
Thus my argument is that for inflation to remain controlled, the Dollar must continue to strengthen. The only way that there will be continued Dollar strength is by the exclusion of the word patience. Provided that inflation remains under control the FED will be able to rise interest rates gently and normalise monetary policy. A sharp rise in the rate of inflation caused by a weakening Dollar would need a kneejerk reaction of a sudden rise in interest rates which almost certainly could throw the economy into a tailspin.
Whilst there are certainly downsides to a strong Dollar, on balance I believe that it has more benefits. The United States has a very significant trade deficit and that is reduced to a certain extent by a strong Dollar. The downside is that it hurts exports. However there is little evidence to support the contention that the strong Dollar is really damaging exports. Whatever may be said American products still lead the way in quality and innovation.
Thus by way of summary, I do think the word patience will be omitted and EUR/USD will return to its path towards party.
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