Intraday Market Thoughts

Fed Brushes Off 3 Main Concerns

by Adam Button
Jan 8, 2015 0:31

The FOMC minutes led to a small round of US dollar selling on hints about a slow pace of rate hikes but overall they were a reminder that the Fed is interpreting news and markets selectively. On the day, the kiwi was the top performer for the second day while the yen lagged. Asia-Pacific trading features data on Australian housing.  In today's Premium trades, we sent 2 new CAD-related trades in addition to yesterday's AUDUSD trades. Full access obtained in the Premium Insights.

A few questions are plaguing the Fed as officials move closer to liftoff but they appear to have answered them.

1. What will be the effect of falling oil prices?

Yellen has hinted at this but the minutes were clear. The boost to consumers is more important than the drag on US energy producers. There was one caveat; that low energy could damage long-term inflation expectations.

2. Why are markets so worried about disinflation

The Fed resolved to study this more but the bulk of the FOMC believes it's not a true reflection of the outlook. Instead, they point to models and survey-based data (largely the U Mich survey) that continue to show stable expectations. With 5-year breakevens now at 1.09% and a poor forecasting track record, the Fed is playing with fire.

3. How will slowdowns in Europe, Japan and China affect the US

The minutes show the Fed took a long look at overseas growth but it didn't damper the upbeat mood. The Fed indicated it expects foreign governments to take action to stimulate growth.  Overall, the minutes said the foreign risks balance out. That sounds optimistic.

Despite those worries, the Fed has resolved to watch the data and on Wednesday ADP employment painted a solid picture with 241K jobs created compared to 225K expected. That led to a brief bout of USD strength but it ebbed after hitting fresh highs against the euro, sterling, aussie and CAD.

Act Exp Prev GMT
ADP Employment Change (DEC)
241K 225K 227K Jan 07 13:15

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