As noted earlier this morning, the Fed faces a rather vexing dilemma going forward.
They want to normalize, but they need to figure out how to do so in a way that doesn’t lead to “excessive” dollar strength lest they should all end up getting purged for treason Erdogan-style.
Of course pressure from an increasingly autocratic executive branch isn’t the only reason why the committee needs to try and keep a lid on dollar strength. There are EMs with massive dollar borrowings to worry about, and of course there’s China, where RMB stability against the TWI basket is contingent upon the dollar not strengthening too fast.
So you know, that’s a tough spot to be in and you kinda wonder whether at this point, Yellen is thinking “I can wait until my time here is done.” Speaking of that, here’s some color out earlier today from Deutsche Bank:
For all the focus on [today’s] FOMC the stakes for the Fed are much higher this year. Two (out of seven) governor posts are vacant, potentially three more vacancies are coming and most importantly Yellen’s chairmanship is soon ending. President Trump is responsible for the appointments and has the capacity to completely re-shape the Fed and the outlook for US monetary policy well into the next decade.
Trump’s Fed appointments will ultimately determine the fate of “dollar policy” this year. For all the attention on recent comments on exchange rates, a Trump Fed’s hawkish or dovish leanings will matter much more.
And who the hell knows how Trump is going to reconcile a desire to replace the “political” Yellen with a more hawkish Chair with the administration’s weak dollar policy. Indeed it will be hilarious to watch as the very same man who just last September decried Janet Yellen for “doing political things” try to explain why a reconstituted Fed will invariably end up completely beholden to the White House (again, echoes of Erdogan and the the CBT).
Anyway, below, find the latest commentary from Bloomberg’s Richard Breslow and Mark Cudmore who give us their take on the Fed ahead of Wednesday’s statement.
Via Bloomberg
I can just imagine the conversation taking place in the Board Room of the Eccles Building. We’d like to be bold. We’d like to take more credit for the improvement in the domestic and global economies. It’s felt so good to talk boldly. But what if we’re wrong? With all this craziness going on, we have a patriotic duty to wait for more clarity. He’s never going to follow through with the things he said to get elected. Will he? Besides, we don’t want to take away the Chair’s maneuverability when she testifies on the 15th.
- And thus we have virtual unanimity among analysts that the FOMC will stand pat. More importantly, leave a rate-hike possibility at that “live” meeting in March a mere chimera. And try to steer away from putting too much weight on the promised, but as yet unseen, fiscal-stimulus proposals
- I’ve had two conversations this week that were illuminating. One with an attendee at a regularly scheduled dinner whose participants are portfolio managers, hedgies and analysts selected because they are highly opinionated. And encouraged to speak their minds. It was apparently unique because for the first time, while people had trading ideas for the short term, there was absolutely no consensus on where markets were ultimately heading
- A second conversation with a fixed-income salesman reported that his client base felt precisely the same way
- Traders are confused, concerned, trimming positions at the margin — and very willing to go either way
- But in the context of staying flexible, they have no choice but to trade. If they are keeping marginally higher liquidity levels, it has to be with the promise they’re looking to put it to work. And you can be sure, if things get too hard in one sector, they’ll just throw more resources elsewhere. Not everything must sink or soar in unison. In fact, one sinker can propel a soarer
- Oddly enough, the Fed, that arbiter of where all markets have traded, believes it can stay in cash. Not sure what to do? Do nothing
- Anything is better to them than be lumped in by historians as repeating the mistakes of the Trichet era. It’s why they ultimately must fall behind the curve. Why they invented the concept of letting the economy run hot. We meant to do it
- They have no interest in the investors’ reality of cutting losers and riding winners. They want to be seen as perfect. But as all traders know, when you think like that, you keep missing one good opportunity after another
****
Expect the Fed to take out one of the last pillars of dollar support today.
- Dollar bulls are still not capitulating despite it being on target for a sixth consecutive week of losses. While some doubts are finally starting to creep in, the majority of analyst notes this week suggest the FOMC can put the dollar uptrend back on track. I’m surprised
- It’s hard to see how the Fed can be hawkish [today] given the economic policy turmoil of the last couple of weeks
- All measures taken so far by Trump’s administration are negative for growth rather than reflationary. This is particularly pertinent when put in context of how optimistic expectations were only two months ago
- The pro-growth policies may come soon but, importantly, there’s no sign of them yet, and the FOMC is obliged to deal in facts rather than speculation and hope
- The economy is nowhere near running “hot.” Inflation is picking up but still hasn’t reached target, let alone given any indication it might run away to the topside
- And now the hard economic data is just starting to roll over, relative to expectations, as shown by the Bloomberg Economic Surprise Index
- Of course the Fed won’t be raising rates today, but it would be just as irresponsible of them to indicate a hike is imminent. Unless Trump changes tack rapidly, March is looking far too soon to even consider tightening policy
- The dollar’s fate is clinging to yield support after technical levels were broken across the board last night. Tomorrow, there may be nothing solid left for it to hold on to. The correction lower could accelerate
