Currency Analyst since 2010

WSJ: don't expect a hawkish Fed

The Fed is widely expected to end its $15 billion-a-month asset purchase program on Wednesday, Oct. 29. Then the natural step will be policy tightening – and traders crave to hear about when it would happen. However, analysts at Wall Street Journal think that “highly anticipated end to so-called quantitative easing will be nothing more than a tactical retreat by the US central bank and that next year’s rate increase won’t materialize”.

The WSJ cites several reasons for such outlook:

  1. US economy is still weak.
  2. Inflation remains worryingly low and below the Fed’s target of 2%.
  3. Some FOMC members viewed the risks to real GDP growth as weighted to the downside.
  4. Some FOMC members expressed concern that weak foreign growth could slow down the US economy. The euro area is the main source of concerns, but the emerging markets don’t offer much solace either: Chinese economy keeps decelerating; Brazil fell back into recession in the first half of the year; Russia is hurt by the consequences of the Ukrainian conflict.
  5. The recent appreciation of USD may hurt US exports and drag down inflation.
  6. The ECB and the Bank of Japan are still at the stimulus stage and will likely do more to support the national economies, so Fed could have no choice but to resume its easing efforts to keep USD competitive in what already looks like a tacit currency war.

For now US dollar lacks strength for a big move to the upside as the market players are unsure because of the lack of information about the Federal Reserve’s future interest rate increases. If the Fed doesn’t come with a hawkish forward guidance this month – and there are reasons cited above to think that it won’t – USD won’t be able to resume a confident uptrend.

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