With the idea of a Federal Reserve interest rate hike quickly fading the only real question left to ponder is what is their next move…if any?
Before that question is answered let’s consider the current economic environment in the United States. First of all Q1 GDP is likely to be much softer than current expectations. Most of the economic data point to it i.e. throw a dart at the Q1 economic calendar and you are sure to hit a soft statistical series. Key to this trend is the $88B Q4 inventory build that is not being depleted. Wholesale and business inventory data from Q1 are sluggish which is not entirely unexpected. More importantly though, Q1 wholesale and business sales are dramatically lagging this anemic inventory growth suggesting a further bulging of finished goods for Q1. This is not a good recipe for Q1 economic growth…or the Q2 outlook.
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Furthermore the dollar has launched in Q1 [perceived Fed tightening of rates], effectively, hamstringing exports [by making them more expensive] while importing deflation from around the globe. The continual jawboning, from the Fed’s own FOMC members and Treasury Secretary Lew, that a well bid dollar equates to signs of economic strength and confidence in the U.S. economy is totally bogus. The dollar’s strength can be primarily assigned to the currency diluting policies of both the ECB and the Bank of Japan…both of which are still at the early stages of open ended debt monetization strategies. Add to that the twenty-four separate central bank interest rate cuts in the first three months of 2015 and, ceteris paribus, the dollar strengthens…especially as the world’s reserve currency [at least for now].
Moreover, Wednesday’s Federal Reserve statement was littered with dovish language. Also referenced was a hint of frustration with the strong dollar and its negative impact on exports. Consider the following excerpts …Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat…export growth has weakened. Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation remain low. And that The Fed’s internal projections for the federal funds rate, at the end of calendar 2015, were halved further demonstrates their unease.
The simplest short term fix, addressing all of these concerns, is to weaken the dollar. The current strength of the dollar truly cuts into both of The Fed’s bureaucratic Congressional mandates. Incrementally slower economic growth is never good for employment [although the data have, thus far in 2015, been very good…although income growth is non-existent] and, as mentioned earlier in this post, a stronger dollar is dis-inflationary by virtue of both less expensive imports and by depressing the value of commodities [almost all of which are dollar denominated]…the most important of many being petroleum.
The new paradigm in the domestic economic mosaic is that the U.S. economy cannot presently withstand the headwinds of an overly starched and strong dollar. Greenback strength also has a negative offshore impact as it increases the costs of dollar based liabilities held by foreign companies/countries – which are substantial. The Fed is well aware of this dilemma and, of course, will respond accordingly as they are hostage to the financial markets.
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Sometime after the initially soft Q1 GDP “print” expect a “trial balloon” of more debt monetization [QE4] issued by some FOMC constituent. Naturally this will weaken the dollar and immediately suspend/reverse the Fed’s dollar based concerns articulated earlier in this post. However, this will also serve to “piss” off both Kuroda [BoJ] and Draghi [ECB]…as their heavily depreciated and shorted currencies will, at least initially, sharply reverse course…and the continual game as to which global economic zone can depreciate their currency the fastest is “on”…again.
In the end, however, this is a truly pointless game. Eventually one of these infinitely diluted currencies will certainly collapse [most likely the yen] as investors finally, and correctly, perceive these actions as economically destructive. This will mightily shake global economic confidence but may, perversely, be the necessary flash point to end the serial money printing illusions of global central bankers.