USD: The risk of a policy mistake – Commerzbank
|Due to the US government shutdown, there is a foreseeable lack of numerous official US statistics, both for the labor market and consumer prices. As a result, market participants are likely to focus more on privately collected data as well as statements from Federal Reserve officials to form a picture of the future US interest rate trajectory. Recently, there has been rather dollar-supportive news in this regard, Commerzbank's Head of FX and Commodity Research Thu Lan Nguyen notes.
Fed cannot make mistakes without facing political consequences
"Most recent statements from Federal Reserve leaders have sounded more cautious about further rapid rate cuts. Dallas Fed President Lorie Logan warned that inflation expectations could become unanchored, as inflation has been above the 2% target for more than four years. Chicago Fed President Austan Goolsbee and Fed Governor Philip Jefferson both pointed to the Fed's dilemma: while inflation is rising, the labor market is deteriorating. Goolsbee specifically cautioned against frontloading interest rate cuts. Both signaled a more patient stance."
"The 'dot plot,' which reflects the projections of individual FOMC members, revealed last month that policymakers have significantly divergent views regarding the appropriate federal funds rate, especially for 2026. Against this backdrop, the remarks by Logan, Goolsbee, and Jefferson are not surprising. It could be inferred that these three belong to the dots in the upper third of the plot. The key takeaway is that there is still no consensus within the FOMC on how to proceed. Despite the numerous downside risks for the dollar, even I must admit that there are risks on the other side as well. Despite political pressure, US central bankers may slow down the pace of rate cuts more than we or the market are anticipating. That would be a strong case in favor of the dollar."
"True independence for a central bank consists of its ability to make mistakes without facing political consequences. I fear, however, that this is exactly what the Fed cannot afford right now. If it mistakenly keeps its monetary policy too restrictive for too long, thereby risking a severe recession, there is a significant danger that the US government could capitalize on such a policy mistake, place the Fed under tighter oversight, and perhaps even gain public support for such intervention. One could argue that the opposite scenario could similarly result in painfully high inflation. That is certainly a valid point. However, the Fed has repeatedly demonstrated in the past that it is better equipped to manage inflation risks than deflation risks."
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.