All One Needs To Know On Fed Policy

THE US DOLLAR HAS SOARED ON THE FOREX MARKET in a manner we’ve not seen in a very, very long while. The reason, of course, is that the Fed has chosen not only to raise the o/n Fed funds rate by 25 bps, but it has openly “threatened” to raise it several times in ’17… at least twice more and perhaps even more than that. No one really should be surprised by the Fed’s decisions for we have put forth the argument often that at least two or more tightenings were likely in ’17, but apparently the entire world has been stunned.

Let us understand one thing here this morning and it is something we have argued dozens upon dozens of times over the three decades we’ve been writing TGL and it is the one thing we know for certain about Federal Reserve policy that we have learned the hardest of ways over that period: that when the Fed changes the direction of its policy… from easing to tightening or from tightening to easing… it moves in that new direction far long and takes rates much further than almost anyone can reasonably imagine they shall do. That’s it! That’s all one needs to know. If one understands that one single notion one understands the Fed better than 98% of those who think that they do!

The Fed “changed” policy last December, and we wrote then the same thing we wrote just above: that this new tightening policy would last for several years and that the Fed funds rate would rise several hundred basis points before the Fed shall change policy again and begin the process of easing. So thus far in the course of one year, the Fed has raised the o/n funds rate by a mere 50 bps; there are several hundred more to go and several years in which to accomplish that task.

We see no reason therefore to parse the language of the Fed’s post-meeting communique, nor do we see any great reason to parse Dr. Yellen’s testimony in her postmeeting press conference for all that would do would be to muddy the waters. The Fed is tightening. It has tightened twice; it shall tighten again and again and again and again as wage pressures begin to put upward pressure upon inflation.

Indeed, for those who were caught off by the Fed’s actions we note once again that the process of tightening actually began more than a year ago when the Fed’s balance sheet as represented by the St. Louis Fed’s adjusted monetary base began to fall. It has fallen sharply and almost relentlessly since and very likely when the St. Louis Fed releases its numbers this afternoon it shall fall once more.

So, in that manner, the dollar has soared. We can fully understand the dollar’s strength relative to the Indian Rupee, the Russian Ruble, the Brazilian Real et al. We can further fully understand the dollars stunning strength since yesterday relative to the Yen and to the EUR. Indeed, further such weakness shall follow hard upon any modest corrections that shall surface, but we do find the weakness of the “other” dollars… the Canadian; the Aussie and the New Zealand dollars… somewhat overextended and somewhat ill-advised. That these “dollars” should be losing on the crosses to the EUR makes little if any common sense to us, save for the fact that the psychology this morning is so one-sidedly US dollar bullish.

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