There is little pushing the Fed to tighten policy. The US is not suffering from the same price pressures as other economies and labour market improvement remains the Fed’s number one concern. Moreover, there have emerged serious question marks over the US economic outlook amid a raft of awful growth figures. The Fed and BoE policy outlooks are very similar; tighter policy can only be considered when sustained growth emerges. The threat of a double-dip recession in both economies remains realistic, and premature tightening could be the tipping point.
Accordingly, we are probably looking at the middle of next year for a Fed rate hike. Bernanke looks highly likely to maintain his “extended period” rhetoric with regard to the Fed’s current ultra-loose monetary policy. However, a third round of quantitative easing would probably only be resorted to if the US did fall back into negative growth. Bernanke is likely to stress the recent weakness of US growth and in the absence of any hints to future tightening, the US dollar looks likely to come under a little pressure. The dollar will remain weak for many months to come, but hopes for hawkish Fed rhetoric are so sparse that we are unlikely to see the greenback suffer any major losses for today at least.
Richard Driver
Analyst – Caxton FX
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