Friday July 28, 2017 - 16:41:11 GMT
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U.S. Monetary Policy Walking A Tightrope
John M. Bland, MBA
Fed Signals QE Taper and No Rate Hike What was expected to be an uneventful Fed meeting Wednesday had a serious impact on forex markets. Curiously, the policy announcement was about as expected with no changes in interest rates Fed Funds (1.00% to 1.25% range). As signaled at the prior Fed meeting in July, the central bank indicated that it would start to wind down its QE portfolio very soon. This wind-down could start as early as after the September 13 meeting. One mild surprise to the markets was another expression of concerns about the low levels of U.S. inflation. If this is borne out by future price data, this could kill any chance for another rate hike this year. Already Fed Funds futures have effectively priced out any risk of a September hike, plus odds for December boost are also negligible. This shift in sentiment hit the USD. The general USD market bias remains negative. It is likely to continue follow the lead of bonds and equities.
Yield Curve To Steepen? On reflection, traders appeared to be torn between concern about the possible impact of rising bond yields on the economy (a policy” tightening”) when put alongside a Fed signal that official rates might not be increased if inflationary pressures do not emerge. In my opinion, the Fed envisions a fairly fast wind-down of its government-backed bond portfolio. Of course, if markets start to show signs of “indigestion”, they could slow down their sales at any time. No action at the short end of the curve taken with additional supply at the longer end would likely result in a steepening of the yield curve. Higher bond yields generally presumably would be USD constructive with U.S. rates already generally higher across the board than their overseas alternatives. Key also would be how equity markets digest such a development.
Yellen Back In Play For Next Fed Chief As for the likely successor to Fed Chair Yellen in January 2018, it appears that she remains in the running. Her policies over the past several years have been as supportive of the Trump economic agenda as his administration might have hoped. From a policy standpoint, Trump has nothing to complain about, but it is possible he might want a businessman in the job, as a matter of principle. Markets might prefer continuity in the post rather than having someone new have to learn the ropes on the job. I give Yellen 50-50 odds on being reappointed at this juncture.
Amazing Trader EVENT RISK Calendar:
Mon 31 Jul
09:00 EZ- Flash HICP
Tue 1 Aug
All Day global Mfg PMIs
12:00 US- PCE Deflator
Wed 2 Aug
12:15 US- ADP Payrolls
14:30 US- EIA Crude
Thu 3 Aug
All Day global Service PMIs
11:00 GB- Bank of England
12:30 US- Weekly Jobless
Fri 4 Aug
12:30 US/CA- Employment
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.
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