It’s a nervy time for investors. There are many factors that should be supporting riskier assets – improving economic outlooks in the U.S, Europe and China, including raising short term interest rates and continued bond buying.
The ‘mighty’ dollar is trading firmer across the board following a hawkish set of comments from Fed voter Harker. The Fed member from Philadelphia reiterated that next months March 14/15 meeting should be on the table for the next rate hike, adding that the Fed is not behind the curve, that the U.S economy is healthy, and that jobs growth is steady.
The U.S. dollar is higher against most major pairs ahead of the President's Day long weekend. American economic fundamentals had a strong week, but failed to gain traction given the rise of political risk as Trump’s administration continues to send mixed messages to markets. The stock market and safe havens like gold and the Japanese yen finished higher against the dollar in a very political week.
“Waiting too long to tighten would be unwise; more policy adjustments will likely be needed if the economy remains on track.” A number of Fed officials chimed in Tuesday and Wednesday to reinforce Ms. Yellen’s message that they expect to raise short-term interest rates in coming months, perhaps as soon as March.
U.S. President Donald Trump pledged on Friday to announce a “phenomenal” tax reform. The first three weeks of the Trump administration did not align with the pro-growth agenda, favoring instead an “America first” protectionism which have weakened the USD. Fed Chair Janet Yellen will testify before the Senate Banking Committee on Tuesday; her take on the U.S. economy will be followed closely by investors.
For anyone looking for significant clues to the future of Fed policy, yesterday’s FOMC statement was a real letdown. The announcement mostly reflects U.S policy makers’ caution in a time of political upheaval. Nevertheless, the Fed indicated that they remain on track to gradually raise short-term interest rates this year.