Fed Gets Best of All Worlds
forexnews.com
The FOMC statement of risks impacted markets by driving the dollar lower, while stocks and bonds rallied. The Fed could not wish for a more favorable outcome as it seeks to keep negative real interest rates in the hopes of further stimulating the economy and avoiding an unfavorable decline in inflation. While rates will remain accommodative, the Fed statement was fairly balanced. This favored Treasuries by maintaining the outlook to keep rates on hold for a considerable period. However, in light of improving economic data the Fed's position can lead to market dislocations in the future if long term rates (managed by the market) were to rise, thus forcing the Fed's hand. So far, this has not been the case as the market has taken the cue from the Fed's cautious wording on policy. But sooner than later record monetary and fiscal stimulus may become a concern for the bond markets.
Nevertheless, the Fed appears willing to maintain favorable rates in light of an economic rebound. It is understood that record fiscal stimulus has had an impact in Q2 and Q3 due to the war in Iraq and tax cuts. These expenditures will not be in place next year and the Fed is leaning to caution over the longer term. Meanwhile economists are looking at a negative real interest rates and a weaker dollar to boost the US economy in 2004. For currency traders, the dollar may therefore continue its decline into 2004 as negative dollar sentiment remains the dominant factor in markets.
Negative Rates Supported by Weak Dollar Policy
On Thursday, Treasury Sec Snow will testify before Congress on currency manipulation and trade. Washington's agenda is more than clear. The strong dollar policy exists in rhetoric only and would like Chinese officials to abandon the USD/RNB peg as soon as possible.
Thursday will also see US Q3 preliminary estimates for GDP in the quarter, expected to rise at an annual rate above 6%. One of the ironies of a high consumption society trying to both stimulate the economy and wean itself of foreign imports is that Americans cannot seem to do both. With half the manufacturing goods purchased in the US coming from abroad, mainly Asia, the trade deficit continues to widen as officials in Washington extend credit and tax cuts, which are still only future liabilities to be paid. In the meantime foreign savings, recycled back into the US in order to keep the dollar from falling, is financing the deficits. At least for now. |
