At Yellen's FOMC, Uncertainty Yields Stasis -- Girding for Currency Battle?
Perhaps this is nothing more than what it says — perhaps there is some issue within the Fed’s charter in regard to holding securities with negative interest rates If this was just a technical adjustment, why did Lacker [President of Richmond Fed] dissent? It was noted in the minutes that the dissent was to “indicate his opposition to foreign currency intervention by the Federal Reserve. In his view, such intervention would be ineffective if it did not also signal a shift in domestic monetary policy; and if it did signal such a shift, it could potentially compromise the Federal Reserve’s monetary policy independence.”
For the record, the Treasury is in charge of the dollar not the Fed. But, just supposin’ here, the Treasury and Fed decided it was time to “sterilize” the impact of foreign central bank actions (ECB QE, for example) on the dollar. In doing so, they would be effectively telling the ECB that growth from lower rates will need to be generated within Europe (meaning fiscal policy) rather than by exporting its high unemployment and low prices to the US. The Fed is clearly in favor of QE abroad, as they noted “Accommodative policy actions announced by a number of foreign central banks had likely strengthened the outlook abroad.” On the other hand, and this Fed never runs out of hands, they do note the negative impact of China’s slowing on emerging nations when they write “ . . . the slowdown of growth in China was noted as a factor restraining economic expansion in a number of countries . . .”
Of course the Fed also seems to limit its view of the dollar’s impact on the economy to the export sector, as if large US firms don’t choose to outsource production when it is cost effective – as we noted in this morning’s Quick Take on Industrial Production when we highlighted the increase in manufacturing capacity utilization while the 3-month rate of change in new orders for nondefense capital goods is now negative.
In sum, there really wasn’t anything new in the minutes to suggest that the Fed has an idea or a plan. They appear to be merely a group grasping at one economic data point or another in the hope that some collected data points signal inflation is finally beginning to rise towards 2%. With monetary policy now tied to this single target, odds of that single first step to raise policy rates in September are beginning to fade. In failing to recognize other possible indicators of where policy rates should be set, the Fed could very well be digging itself into a rather difficult position should growth start to fade rather than accelerate. Perhaps this is why they decided at this meeting to take care of some housekeeping in regard to foreign exchange operations. If it was just January housekeeping, why would Lack feel the need to dissent?
see more news & signals in https://www.mql5.com/en/signals/111434
