One Step Forward, Two Steps Back


  • FED CONTINUES TO LET DOWN HAWKS
  • US DOLLAR AT RISK FOR MORE WEAKNESS
  • INFLATION NOW KEY FOR FED REVERSAL

OFFSETTING - When it comes to Fed forward guidance and monetary policy reversal, it seems the strategy has been grounded in an ideology of one step forward, two steps back. Whether or not the Fed needs to move on rates is beside the point. The issue for me is just how unbelievably unreliable the Fed has been with its direction. On Wednesday, the Fed pulled it off yet again, removing the 'patient' language from the monetary policy statement, but at the same time, more than offsetting this gesture by downgrading growth and inflation forecasts, while also lowering rate hike projections. I had been taking a lot about the need for a US Dollar correction over the past few days and suggested the fundamental catalyst would come in the form of a more dovish FOMC decision. And in the end, this is exactly what we got.

BUCK IN RETREAT - So now where do we go from here? At this point, I think we need to consider the possibility the US Dollar continues to sell off for a little while. While the broader monetary policy divergence theme is alive and well on a more medium-term basis, in the short-term, this latest Fed decision has sent a message the Fed isn't going to be moving any time soon. I believe we could see the US Dollar under pressure for even more than a few days and would be open to the prospect for some selling over the coming weeks. I think for the Fed to really get moving, we are going to need to start seeing signs of a pick up in inflation.

It now appears the Fed won't move until inflation really starts to pick up. Via @joelkruger

INFLATION IS KEY - Up until now, inflation has been subdued and this has given the Fed plenty of excuse to leave policy on hold. But the moment we start to see a more prominent uptick in US inflation, will be the moment the Fed actually begins the rate hike cycle and the moment the US Dollar is poised for the next big surge. I'm not calling for any major structural shift and still favor the Buck. But in light of the Fed's latest move, the US Dollar uptrend should have a hard time regaining momentum. Another market that will be important to watch is US equities. This latest rate decision will likely invite a fresh wave of demand, with the Fed sending a message free money aint goin nowhere just yet. Consider the possibility stocks break to yet another record high in the sessions ahead.


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