FOMC Hedges its bets
February 23rd: Highlights
- FOMC perfects the “art of saying nothing”
- Mnuchin second guesses himself
- U.K. no longer fastest growing G7 economy
Interest Rate Differential set to grow
This is the art of saying nothing! It’s like stating the obvious but a little more refined. You will never see a finer example of bet hedging!
Rather than try to dissect those words, better to throw in a few of my own. The U.S. economy is growing at, or near to, expectation. Data releases are for public consumption, the metrics used by the Fed give a better insight to longer term trends since it is not good to change the direction of monetary policy at every meeting. The jobs market is showing close to full employment, wages growth is moving into inflationary territory and despite a strong dollar and its anti-inflationary effect the trend for inflation is higher. Does this point to an interest rate hike on 14/15 March? YES!
Welcome to Mnuchinland!
The recent comments by President Trump and his Senior Trade Advisor Peter Navarro, that the U.S. was suffering as other countries benefit from weaker currencies, are clearly at odds with Mnuchin’s statement. I am assuming they realise that not every currency can be strong since relative strength is the measure they are all judged by.
U.K. Economy Continues to defy predictions
A 1.8% rise for 2016 as a whole dropped the U.K. below Germany at the top of the global growth league. Germany grew at 1.9% in 2016 as it took advantage of a weak Euro (according to President Trump anyway). The truth is that it had more to do with productivity and efficiency.
The Bank of England still expects overall growth in 2017 to be 2% but the headwinds caused by the Brexit negotiations place a huge question mark against any economic predictions. This pushes the possibility of a rate hike back to Q4 at the earliest, but if inflation starts to pick up then the economists most ugly word “stagflation” may peek above the parapet.
Aussie dollar falls as Economy falters
Later today the Governor of the Reserve Bank will speak about the economy and the prospects for interest rates. Phillip Lowe has been in place for five years and has been seen to have a similar style to BoE Governor Mark Carney. He is a steadying influence unphased by having to take tough decisions.
Have a great day!
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”