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More Dovish Fed Stance Won't Sink US Dollar

More Dovish Fed Stance Won't Sink US Dollar

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Thursday, 21 March 2019 10:49 AM Current | Bio | Archive

The Federal Reserve surprised the financial markets a bit by changing abruptly its somewhat more hawkish stance it displayed earlier in the year.

The fabled dot-plot, which people think represents forecasts, but which actually does nothing of the sort, has changed.

While the dot-plot move does not rule out a rate increase this year, it nevertheless does signal that the balance of probabilities is now against a rate increase this year. How strongly the probabilities are stacked against a rate hike this year is not known.

For investors, it is also worth noting Fed Chair Jerome Powell was asked during his press conference: “the state of the policy was still accommodative and that the economy didn’t require that anymore. Is that still the case? If so, how do you justify the removal of the need for some further interest rate increases?”

Powell answered: “We think our policy stance is appropriate right now. We do. We also know that our policy rate is now in the range of the Committee’s estimates of neutral. So we’ll be—again, we think our policy stance is appropriate.”

Yes, as always, the devil is in the details.

The Fed also gave details of its shift from the current passive tightening quantitative policy to organic tightening of quantitative policy. The Fed will stop producing its balance in nominal dollar terms in September. It will continue to reduce its balance sheet as a share of GDP, that is to say organic tightening into 2020.  

Overall, Powell was sounding optimistic on the economic outlook, but pricing power is not that much in evidence in the U.S. economy as the inflation imperative to raise rates quickly is not there “now” in the view of the Federal Reserve.

Investors could perhaps do well to look at profit margins in an environment of rising costs and subdued pricing power.

President Donald Trump signaled yesterday that the administration may not be so growth friendly. In the barrage of rhetoric over trade, President Donald Trump said that tariffs (taxes on U.S. consumers) on goods partially made in China could stay in place for a substantial period of time, the Asia Times reported.

In the meantime, the dollar index DXY is back up by about half of a percent to around 96.10 after falling yesterday through the 95.82 important support level on the apparently more dovish turn of the Fed.

I personally don’t expect a steep decline of the dollar now. A steep decline of the dollar should have occurred earlier in the year when the Fed’s pause was announced and it didn’t occur then. Therefore, this “one” of the reasons I don’t expect it to happen now.

UK Prime Minister Theresa May is in Brussels today to ask for a short delay to the impending EU-UK divorce. The European Union may or may not agree.

The problem is that the decision rests with six hundred fifty of the most unpredictable people on earth, namely the members of Parliament (MPs) of the House of Commons, which is the lower house of the UK Parliament. The upper house of the UK Parliament is the House of Lords.

One possible scenario is that the UK Parliament rejects the government’s deal and there is a long delay and Prime Minister Theresa May resigns. That could then result in renegotiations because the UK would likely change its position and the European Union has said that it would reopen negotiations in that event.

There also may or may not be new elections in the UK in this process.

Financial markets are generally optimistic about the UK maintaining close ties with the European Union in some way, shape or form henceforth, the BBC reported.

One point worth noting is that the UK economy is continuing to do relatively well in the absence of any proper government for the last couple of years.

Investment in the UK suffered under Brexit but otherwise things have been all right.

For example, UK tax revenue has been consistently surprising to the upside, suggesting that the economy is doing better than reported. In January, UK government revenues increased to 79,391 GBP million, which is about $104,000 million and was an all-time high, and was up from 59,568 GBP million or about $78,000 million in December of 2018.

Investors don’t seem too concerned at the moment with the FTSE 100 index in London up 0.40 percent. The British pound also appears to have stabilized somewhat at around $1.3125, against about $1.3220 yesterday.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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I personally don’t expect a steep decline of the dollar now.
fed, investors, profit, costs
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2019-49-21
Thursday, 21 March 2019 10:49 AM
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