• Home ::
• Fundamental ::
• Interest Rates ::
• Diagramming the Fed

• Send
• Print
• Add To

23899c0e-1e59-43b9-9bd3-f5242216cbaa

0

0

Diagramming the Fed

Tue, Aug 5 2008, 17:39 GMT
by Joseph Trevisani

FX Solutions

All market focus will be on the Fed at 2:15 pm and all attention will be paid to a few sentences in the FOMC statement concerning inflation. The Fed will leave the Fed Funds rate unaltered at 2.0%

The FOMC has intensified the focus on inflation over the last two meeting. In the April 30th statement inflation was mentioned only once in the third paragraph and in a form similar to that of several prior meetings. "Although reading on core inflation have improved somewhat, energy and commodity prices have increased, and some indicators of inflation have risen in recent months. The committee expects inflation to moderate in coming quarters...."

In the statement following the June 25th meeting inflation merited two mentions, in the third and the fourth paragraphs. The third paragraph specifically mentioned energy prices as in prior statements though in stronger terms, "However in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlooks remains high".

The next paragraph opened with a mention of the "substantial easing of monetary policy to date". This phrase was an addition and is a clear statement that the Fed Board expects the 325 basis points of cuts to be enough to provide economic expansion. Next was a clear summary of the FOMC general economic view. " Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased", (my italics). In a public statement such as this no word and no repetition is without import.

The currency pieces for the dollar are in place. The US currency has gained 3.4% against the euro from its mid July peak at 1.6037. The euro is now hovering above two substantial technical supports lines: the 38% retracement of the February to July rise this year and the 23% retracement of the August 2007 to July 2008 climb. If these are breeched the way to 1.5200 and 1.5000 is opened. Last August just before the sub prime and credit crises erupted the euro was at 1.3400.

The Fed has recently highlighted its concerns about inflation and intensified the inflation rhetoric in the June 24th statement. But it cannot yet raise rates. The economy is still weak with worrisome if not unknown risks in the banking, financial and consumer credit and mortgage sectors. High oil prices are crimping American consumer spending, the engine of GDP.

 
Crude oil has dropped almost 20 percent since President Bush called on Congress to permit US energy development. When better to kick a commodity market than when it is down? A stronger dollar will be one more reason for oil traders to sell oil futures. A stronger pitch against inflation from the Fed will support equities whose main worries now are inflation and the effect of inflation on US consumer spending and corporate profits. The Fed can certainly provide the impetus for a stronger dollar, and in turn lower oil prices, higher consumer spending and all the economic good that will flow from that. Lastly, currency trader are looking for more Fed displays on inflation, and modern central banks hate to disappoint their constituents.

The pieces are in place will the Fed deliver?

Published on  Tue, Aug 5 2008, 17:41 GMT