Saturday March 21, 2015 - 11:27:31 GMT
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Fed Policy Flip-Flop -- March 22, 2015
What Has Changed?
On Wednesday, March 18 the Federal Reserve announced no changes in its target Fed Funds interest rate, but removed the key word "patient" from its policy statement. In her press conference afterwards, Fed Chair Yellen went to pains to underscore that removal of that word did not mean that the central bank is not now "impatient". If anything the tone of her comments seemed to suggest the central bank is no longer in a rush to normalize policy.
Rate Hike Not Imminent
A Fed rate hike is now not as imminent as it had been. There were some significant changes at this meeting. What changed is that Fed Chair Yellen backed away from her relatively hawkish posture from late January. There was a change in policy tone that reflected a lowering of Fed growth and inflation forecasts from earlier this year. The focus of policy has also now shifted away from employment to bringing the inflation rate back to its target level. The Fed also seems to have given up on the notion of forward policy guidance and warned that policy now can change without advance warning. Furthermore, the Fed has passively entered the currency wars by citing the drag on the economy of the strong USD.
What Has Not Changed
What has NOT changed is that policy is still data dependent. This has in fact been reinforced except for the change in focus to inflation. Also, what has not changed is the wide interest rate spread between the U.S. which the EZ and it is likely to persist for at least a year or longer.
On balance, I still favor the USD vs. the EUR but by less so than before Wednesday. Something else that hasn't changed is that we will all will continue to sit here second guessing the Central Banks of the world.
The major focus in the week ahead will be flash PMI reports on Tuesday followed by U.K. and U.S. CPI data. On Wednesdays the monthly German IFO survey will be released. Be sure to refer daily Global-View to see the continuously UPDATED Economic Calendar and the Forex Forum for the complete list of key items (actual data, selected charts, etc.) as they are released.
John M. Bland
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