Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Friday Stock Market CRASH Following Israel Attack on Iranian Nuclear Facilities - 19th Apr 24
All Measures to Combat Global Warming Are Smoke and Mirrors! - 18th Apr 24
Cisco Then vs. Nvidia Now - 18th Apr 24
Is the Biden Administration Trying To Destroy the Dollar? - 18th Apr 24
S&P Stock Market Trend Forecast to Dec 2024 - 16th Apr 24
No Deposit Bonuses: Boost Your Finances - 16th Apr 24
Global Warming ClImate Change Mega Death Trend - 8th Apr 24
Gold Is Rallying Again, But Silver Could Get REALLY Interesting - 8th Apr 24
Media Elite Belittle Inflation Struggles of Ordinary Americans - 8th Apr 24
Profit from the Roaring AI 2020's Tech Stocks Economic Boom - 8th Apr 24
Stock Market Election Year Five Nights at Freddy's - 7th Apr 24
It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- 7th Apr 24
AI Revolution and NVDA: Why Tough Going May Be Ahead - 7th Apr 24
Hidden cost of US homeownership just saw its biggest spike in 5 years - 7th Apr 24
What Happens To Gold Price If The Fed Doesn’t Cut Rates? - 7th Apr 24
The Fed is becoming increasingly divided on interest rates - 7th Apr 24
The Evils of Paper Money Have no End - 7th Apr 24
Stock Market Presidential Election Cycle Seasonal Trend Analysis - 3rd Apr 24
Stock Market Presidential Election Cycle Seasonal Trend - 2nd Apr 24
Dow Stock Market Annual Percent Change Analysis 2024 - 2nd Apr 24
Bitcoin S&P Pattern - 31st Mar 24
S&P Stock Market Correlating Seasonal Swings - 31st Mar 24
Here's a Dirty Little Secret: Federal Reserve Monetary Policy Is Still Loose - 31st Mar 24
Tandem Chairman Paul Pester on Fintech, AI, and the Future of Banking in the UK - 31st Mar 24
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How the FOMC Interest Rate Meeting Will Impact US Dollar

Currencies / US Dollar Apr 29, 2008 - 06:37 AM GMT

By: Money_and_Markets


Best Financial Markets Analysis ArticleJack Crooks writes: The Federal Open Market Committee (FOMC) meets this week. As you might imagine, a lively topic of conversation this weekend among currency traders is the direction of the infamous Fed Funds rate.

The obvious question leading up to Tuesday's interest rate decision: What are the implications of this FOMC meeting on the U.S. dollar? More specifically, has the Fed Funds rate found a bottom, or does the U.S. central bank have more work to do?

Today, we'll explore the Fed Funds rate argument from the perspective of both dollar pessimists and enthusiasts, giving each camp equal due.

In light of the fact that the University of Michigan/Reuters Consumer Sentiment Index just plunged to a 26-year low, let's give the gloomers and doomers their say first ...

Dollar pessimists believe there is STILL no positive argument in favor of the U.S. economy.

The Federal Reserve's dual mandate — maintaining economic growth and price stability — has become quite a flash point in currency circles. Much of the dollar's demise has been attributed to the Fed's obligation to buoy growth even when inflation isn't necessarily contained.

And keeping the U.S. economy above water hasn't been an easy task for them. I've consistently checked-off a myriad of soft spots that are catching up with the economy and infecting the core.

Federal Reserve Chairman Ben Bernanke continues to face intense scrutiny ahead of Tuesday's FOMC meeting.
Federal Reserve Chairman Ben Bernanke continues to face intense scrutiny ahead of Tuesday's FOMC meeting.

Among them are ...

  • An unstable manufacturing sector;
  • Deteriorating business conditions;
  • Sluggish consumer spending;
  • Serious slack in the labor market; and
  • A widespread feeling that money isn't so easy to come by anymore.

And almost certainly, all of the aforementioned troubles have been initiated or exacerbated by the ongoing U.S. housing market collapse.

I'm not going to drag you though all of the painful details right now because, for all I know, you're getting bored with every new housing-related disappointment you hear about.

Suffice it to say, the impact of the housing debacle on U.S. consumers has been swift, sudden, and severe. This in turn has, and will persist in creating major headaches for the financial sector. American Express told analysts yesterday that financially stressed consumers are making fewer payments less often.

As a result, dollar pessimists believe the U.S. economy will continue to falter, giving the Federal Reserve no choice BUT to cut interest rates even further.

I have to admit; they do have a point. After all, the FOMC has sliced an unprecedented 300 basis points off the Fed Funds rate since their September monetary policy meeting.

On the other hand ...

Dollar optimists believe intense commodity inflation will FORCE an adjustment to Fed policy.

The Fed's dual mandate has left them somewhat handcuffed to a sinking economy. But at least they sometimes recognize that inflation risks exist. But the fear of inflation and inflation are two different animals. The Fed has the fun job of keeping both beasts under control.

Can you imagine what's going through their heads right now? Crude oil topped $119 a barrel this week. But beyond the heavily monitored energy prices, food has stepped right up into the media spotlight.

Dollar enthusiasts are betting that soaring commodity inflation will ultimately force the FOMC to revaluate its monetary policy.
Dollar enthusiasts are betting that soaring commodity inflation will ultimately force the FOMC to revaluate its monetary policy.

Riots have broken out in Haiti because of food shortages. A handful of countries that include China and India have pulled back on their rice exports in order to sufficiently meet domestic demand. And we even learned this week that two popular U.S. wholesalers (Sam's Club and Costco) are monitoring the amount of bulk rice purchases they allow customers to make.

Dollar optimists believe that runaway inflation on commodities will ultimately warrant some kind of adjustment to Fed policy. Consequently, this would be good news for the greenback.

Why? Few analysts will argue that the Federal Reserve needs to hike interest rates. But the possibility that the fed may halt its easing campaign is growing among analysts.

And perhaps that's JUST what the doctor ordered.

A monetary policy revaluation could spark a legitimate dollar rally!

If Fed Chairman Ben Bernanke and Co. were to carve out a bottom-turn in their easing campaign, it just might give buyers enough reason to come out in support of the dollar.

And a legitimate dollar rally would likely impact commodities, considering the extreme negative correlation that's existed between the two parties.

Fed Watch: Given the way things stand, I'd say ...

If you're looking for some currency specific advice heading into Tuesday's FOMC meeting, have a look at the following chart of the U.S. dollar index. It may offer up some guidance.

U.S. Doller Index Daily

Each of the red numbered arrows reflects the size of Fed interest rate cuts in the last six monetary policy decisions. Each box encapsulates those trading days surrounding the decision.

Given the way things stand, I'd say a rate cut of 25 basis points or fewer likely won't kick off an extended dollar decline. And if the Fed does opt out of rate cuts this time around, it would be a huge departure from expectations leading up to the decision.

That, of course, could kick off a sharp dollar rally.

Best wishes,


This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit .

Money and Markets Archive

© 2005-2022 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in