The minutes of the September Federal Reserve meeting are due this Wednesday and with it, we will plunge back into a discussion as to whether the phrase “considerable time” is actually worth the paper it’s written on. The Federal Reserve meeting itself was notable for its appeal to both bulls and bears, doves and hawks. While the “considerable time” wording remained in the Federal Reserve’s statement, we believe this is simply on the basis of giving the central bank a little more time and we think that Wednesday’s minutes will emphasize this.
When asked in the post-decision press conference just what “considerable time” meant, Fed Chair Janet Yellen tap-danced like a pro and re-emphasized that there is no “mechanical” definition. As we have sometimes characterized the Bank of England’s forward guidance plan, this is “forward suggestion” at its finest; wave your arms around and distract the markets as much as possible while working out what to do.
Dollar has run higher since the meeting as rate targets portrayed in the Committee’s “dot chart” release showed a gradual increase in expected interest rates through 2015 and 2016. By the end of 2015, rates are expected to be around 1.375% in the US, up from 1.25% at the June meeting. The average for 2016 shifted to 2.68% from 2.53% in June. Calculating and allocating that back, that would suggest a 25bps increase as early as April in the US. We think this unlikely at the moment however.
Inflation expectations were also revised higher and it is instead to these that we look. For all the chatter about the statement, and we are guilty of this, we must not forget that the economic data moving forward is the most important indicator. With the statement meaningless, the dollar has resumed its strengthening trend.
To be honest, should the dollar persist in strengthening through the rest of Q4, then it is more than likely that the tightness in monetary conditions that would materialize – higher yields for example – would be roughly equal to what the Federal Reserve is looking for throughout the whole of 2015. As we stated in the aftermath of the strong payrolls announcement on Friday and the disappointing European Central Bank release on Thursday, we think that we may have put in a near-term top in the USD.
That is not to say that the dollar uptrend is over. We still remain very positive about the USD – as does much of the market – and we would maintain that any weakness in the dollar against EUR, AUD, GBP and NZD in particular is bought up. It may not take place this week, however. Data remains the key and with a quiet week likely, we are looking for USD to maintain a level of strength but without much onward progression.