Fed Tightening Likely Pushed Out

Investors will get a glimpse into the Federal Reserve’s thoughts on the economy and monetary policy on Wednesday when the FOMC releases their January post-meeting statement. Expectations are for little to change in the Fed’s statement, with a likely reiteration of “patience” as it relates to raising the Fed Funds Rate. The delay in raising rates is likely to continue throughout much of 2015, as inflation remains subdued and the rest of the world engages in monetary policy easing. In addition to the ECB’s announcement of quantitative easing last week, Central Banks in Canada, Denmark, India, Switzerland and Turkey all lowered policy rates in the past 10 days. As we’ve touched on in both our weekly notes and our year-end letter, these actions are igniting a global currency war in which the dollar is losing the relative competitiveness battle. Many U.S. economic bulls are quick to point out that a strong dollar will have a limited impact on the U.S. because only 15% of GDP is export driven. We worry about the tertiary impact that a stronger dollar will have on both inflation and corporate America. A stronger dollar lowers import prices, which causes import deflation. It also causes American multinational corporations to feel pressure on financial results due to currency translation gains and general competitiveness pressure. We will hear more about pressure on corporations in the coming days as companies report earnings results. The impacts from global weakness and a strong U.S. currency leave room for Fed patience as the pressure to raise rates is low.    

Source: Bloomberg, FOMC