Fed wobbles, stocks stabilise, and we start from square one once again. President Trump has launch yet another attack at Jerome Powell’s Federal Reserve Bank for its observably hawkish approach to US monetary policy. The reserve bank will meet tomorrow to decide whether to raise its domestic interest rates for the fourth time in 2018. Interest rates in the United States of America currently operate within a band between 2.00 and 2.25%. At present the market is still pricing in a 25-basis point hike to the lower and upper bound of this rate following tomorrow’s meeting. However, Trump’s vitriolic attack on the Reserve yesterday highlights just how much popular, political and market criticism there is against this decision:
The interest rate differential between the United States and the rest of the developed world has been the major driver of Dollar strength throughout 2018. However, investors’ confidence and belief that the Federal Reserve will continue to normalise monetary policy beyond present levels is beginning to fade, opening the door to Dollar weakness. President Trump reinforced his attack on Chairman Jay Powell’s persuasion to raise rates today, once again turning to social media:
The criticism has led market participants to question whether the Fed might succumb to the political pressure that the White House is placing upon the supposedly independent monetary policy authority. Unsurprisingly, the threat to the Dollar’s driver of growth led to early selling pressure at market open this morning. However, following two consecutive days of declines within US stock market indices, early positive futures markets and a strong bid on equities at market open in New York supported the greenback and outweighed the concerns on monetary policy. If the Fed does not hike monetary policy tomorrow evening (UK time), the Dollar should be hindered by weakness amidst a glut in supply. Markets at the moment still expect a hike but it is clear from looking further ahead in the curve that they are seriously doubting the commitment of the Fed to raise rates in the coming months. A no-hike could signal the end of peak Dollar strength leading into 2019.
Discussion and Analysis by Charles Porter