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Fed Has No Effective Ammunition Left to Revive US Economy

Fed Has No Effective Ammunition Left to Revive US Economy

(Dollar Photo Club)

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Monday, 01 August 2016 07:12 AM Current | Bio | Archive

New York Fed President William Dudley said in a prepared (enlightening) speech: “Market expectations, to my eye, derived from federal funds futures prices, which price in no more than one 25 basis-point rate hike through the end of 2017 ... appear to be too complacent.”

He added: “If the upcoming information validates my view of the outlook, then U.S. monetary policy will need to move at a faster pace than implied by futures prices to a more neutral posture as the labor market tightens further and U.S. inflation rises … It’s premature to rule out further monetary policy tightening this year. It depends on the data, broadly defined, and as we all know, that’s not something one can predict with any great accuracy.”

About the value of the dollar, and this is important for all investors, Mr. Dudley gave really interesting remarks that should give us a somewhat better understanding of where the dollar could be heading (or staying) over the near to median term (direct correlation to global growth) and how the Fed will try to manage keeping the dollar at reasonable levels without running the risk of being accused of targeting the value of the dollar: “U.S. financial market conditions depend, in part, on the stance of U.S. monetary policy relative to monetary policies abroad. If the economic outlook abroad deteriorates and this causes foreign countries to pursue a more accommodative set of monetary policies, then the dollar would likely appreciate … the U.S. interest rate path has come down in tandem with the foreign interest rate paths and the dollar has appreciated only modestly … This is a crucial point and I want to make sure there is no misunderstanding. The Federal Reserve is not targeting the exchange value of the U.S. dollar. What the FOMC considers are financial conditions broadly defined, because they affect the saving and investment decisions of households and firms. The dollar is but one component of these financial conditions.”

In my opinion, it will be what happens abroad to the growth scenarios of the other big economies of the world that all, at least so far, remain in the doldrums, which will be one of the main drivers that will guide the Fed finally deciding when to start for real its long undertaking of normalizing its monetary policy.

A small hike of 0.25 percent, whenever that should come, shouldn’t be considered as a real start of normalizing of the Fed’s policy.

Of course, a sudden strengthening of the U.S. economy would change everything, but where aren’t even close to that at present.

So, it looks like we are headed lower for longer, which still doesn’t mean forever, but which also means the Fed is at serious risk of falling further behind the curve, as it didn’t start raising interest rates when it had the opportunity to do so.

Let’s be honest, the Fed has practically no effective ammunition left in its arsenal in case the U.S. economy should suddenly have to face an important weakening of its economy.

Of course, so far practically nothing points in that direction, which Mr. Dudley also confirmed by saying: “I expect economic activity to expand at roughly a 2 percent annualized pace over the next 18 months, appreciably above that of the past three quarters.”

In context of growth abroad, the official Chinese manufacturing sector survey unexpectedly fell below the 50-mark again, albeit only marginally, but with overall order growth only modest and export orders continuing to fall.

The final Euro area Markit manufacturing PMI for July edged lower to 52 from 52.8 in July with growth stalling, which is worrisome, in Italy and Spain while France and Greece remaining in contraction.

In the EU bank stress test exercise, which was limited to 51 banks, Italy's Monte dei Paschi, two of Ireland's main banks, AIB and Bank of Ireland, Austria's Raiffeisen and Spain's Banco Popular came out with the worst results in the EBA's test of the main European Union (EU) lenders. In addition, Italy's largest lender, UniCredit and Germany's 2 biggest banks, Deutsche Bank and Commerzbank, were among the 12 weakest banks in the test, along with the British Barclays bank.

No, they aren’t out of the woods yet over there, not by a long shot.

Finally and always interesting for investors to know; Goldman Sachs strategy team just informed its clients it is overweight cash and has downgraded equities to underweight over 3 months while remaining neutral over 12 months.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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Let’s be honest, the Fed has practically no effective ammunition left in its arsenal in case the U.S. should suddenly have to face an important weakening of its economy.
fed, investors, economy rates
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2016-12-01
Monday, 01 August 2016 07:12 AM
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