Tuesday March 22, 2005 - 11:18:00 GMT
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Black Swan Capital - www.blackswantrading.com
$'s future cost is key
“If all the financial experts in this country were laid end to end, they’d still point in all directions.”
It’s starting to get expensive to borrow all those dollars that all those players want to sell short. It will probably become a bit more expensive today, as the Fed is expected to hike for rates a seventh time since its normalization campaign began. But the real concern for the dollar bears is how much faster and farther the cost of dollars will rise.
yield curve chart
So today, the players watch the words no the deed for clues—will the “measured pace” terminology disappear?
“As I see it, inflation risks are skewed higher and the economy’s momentum is impressive. Moreover, even a 2¾% level for the funds rate is below the low end of what most Fed officials describe as the 3-5% range they think includes the so-called “neutral” rate. That’s the rate at which policy is neither stimulative nor restrictive, and which most believe is consistent with the happy combination of stable inflation and full employment. Markets are only gradually beginning to price in a higher interest rate trajectory,” writes Morgan’s Richard Berner.
And if the words measured are dropped from the Fed boiler plate…
“While that description falls short of a commitment to the pace of future actions, it was clearly designed to influence and has strongly influenced market expectations. A change in language would give officials more flexibility to respond to unfolding inflation risks or to other economic developments. We think that a change is coming, but that officials aren’t quite ready to make it yet,” according to Mr. Berner.
For some reason, whether it be because of the belief structural concerns were going to tank the dollar, or because they didn’t think the US economy would continue to grow, it seems players in the market are somewhat surprised that rates could ratchet up faster from here. The background concern now is that if inflation does rear its head, it raises the possibility that the Fed will take a 50-basis point bite of the apple in the near future. And that possibility changes the equation for the dollar substantially. We may find some answers today.
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