Markets believed the Fed, but what if the reality turns out to be different?
The Fed isn’t lying, it’s just not telling the whole truth.
The secret of a good relationship is a bad memory. Investors blindly believe the Fed, having forgotten the events of the 1970s. At that time, the Fed was trying very hard to control too high inflation, and it cost both the economy and the financial markets an arm and a leg. Such levels of 10-year US Treasury bonds yield, excluding the present CPI (-3.7%) over the past 70 years have appeared only following the results of 10 months. All of them occurred during the period of the highest inflation in 1974 and 1980.
All bets are off. Today, a huge number of positions on various financial instruments are open on the assumption that inflation, according to the Fed, will be temporary. US stock indices are setting all-time highs, Treasury yields for no apparent reason are falling down, while the dollar is weakening before our eyes. Everyone firmly believes that the Fed will continue to supply massive amounts of cheap liquidity. The central bank will not leave the debt market, even if the Fed officials cancel the $120 billion QE program. What if the reality doesn’t match the promises?
– Fed, did you lie to us?
– No, I was just not telling the whole truth!
Why is it generally accepted that the central bank should be independent? Unlike politicians, the regulator cannot satisfy the interests of a particular group of people. If the Fed starts to implement policies aimed at weakening the dollar, then consumers will suffer, for whom foreign goods will become more expensive. If the regulator comes to terms with the strengthening of the greenback, then exporters of US goods will show discontent. The Fed always needs to find compromises, so it has to mislead the financial markets, giving them more new puzzles.
Paradoxically, the one who invents the problems earns more than the one who solves them. Investors have remembered the phrase “don’t resist the Fed” and began buying stocks and bonds and selling the dollar. At the same time, the worst weekly decline in Treasury yields makes one think that European and Japanese accounts participated in purchasing these securities, since the greenback has fallen in price, and it is now possible to buy US bonds. Isn’t that why the EURUSD price has stalled despite falling US debt market rates?
The consolidation of the major currency pair has made some investors bored. The bulls are unable to cope with Christine Lagarde, who claims that the eurozone economic recovery is slower than in the US. The bears do not find the strength to test the Fed as it was in March. Boring …
– Do you feel bored, mister?
– Not that much…
In the market, you need to be vigilant. It needs to be constantly monitored because trends are replaced by consolidations, and new trends follow narrow trading ranges.
Price chart of EURUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.