The Fed’s Dilemma

In Blog by Michael Arnold

The key first paragraph from the Federal Open Market Committee’s (FOMC) policy statement had a significant change. The March 16th statement read “Information received since the Federal Open Market Committee met in January suggests that economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months. Household spending has been increasing at a moderate rate”. After the initial first 10 words, which are always basically identical (save for the change in the month referenced), the statement changed to, “labor market conditions have improved further even as growth in economic activity appears to have slowed. Growth in household spending has moderated, although households’ real income has risen at a solid rate and consumer sentiment remains high”. When one considers that they have also removed from the statement, the sentence “global economic and financial developments continue to pose risks”, then you can only come to one conclusion; The FOMC is more worried about home than abroad. If that’s true, then it is now less like that they raise rates again than it was at the last meeting on March 27th. That was only 6 weeks ago.

Have things changed that much? Well, since that time, U.S. economic data has softened, especially GDP and inflation data, oil prices have risen 17% and the dollar index has weakened by 3%. Here’s the dilemma: the Fed presumably wants the dollar to strengthen if Europe and Asia are doing better (which their statement implies), is their opinion and the U.S. economy is strong (which their December rate hike implies). However, in December the raised rates by .25% and announced potentially 4 more hikes in 2016 and the dollar weakened. Now they are removing the hawkish* tone and signally potentially 2 more hikes in 2016 and again, the dollar weakened. The Federal Reserve Bank does not have direct control of the direction of the world’s reserve currency, the market does, but it would seem the market is no longer looking to the Fed for direction. They are looking at the global economic situation. And that’s something the Fed has NO control over.

* A hawk is a policymaker or advisor who is predominantly concerned with interest rates as they relate to fiscal policy. A hawk generally favors relatively high interest rates in order to keep inflation in check. In other words, they are less concerned with economic growth than they are with recessionary pressure brought to bear by high inflation rates. (from

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