Is there a ceasefire in the currency wars? The answer to that question matters for a simple reason: a strong US dollar tends to suck money away from emerging markets and “risk” assets. It also tends to benefit tech stocks and work against gold.
Bloomberg’s dollar index is up 25% in the last three years. But it’s down 4% year-to-date. It’s stalling. Why? The jury is out on whether US interest rates will rise again this year.
There were mixed messages coming out of the Federal Reserve leadership yesterday. Fed Chairwoman Janet Yellen took to the stage with Paul Volcker and Ben Bernanke and muddled things up. She said: “There is accommodation in the monetary policy that we have. But we think the gradual path in rate increases will be appropriate… We remain on a reasonable path and I don’t think December was a mistake.”
A “reasonable” or “gradual path” would see US rates rise from 50 basis points – the Fed raised them by a quarter point in December 2015 – to something more… normal. What’s normal? Several hundred basis points higher would be a lot more normal. But there are 200 basis points between here and normal – or at least four rate hikes given the Fed’s current pace.
Source: Bloomberg
When you put it that way – four rate hikes of 50 basis points – it seems highly unlikely we’ll get anywhere close to that this year, or even in the next two years. It would throw stocks in a tail spin. And the Fed is traditionally reluctant to touch the interest rate during election years.
But there is dissent within the Fed camp. San Francisco Fed President John Williams says: “If the US economy continues to add jobs at the pace we’re seeing, if inflation continues to improve, then clearly we should be raising rates.” You’ll find a couple of data-dependent “ifs” in the statement. But that’s hawkish compared to Yellen.
The bottom line? Central banks have to act like they’re in charge and they control things. But if we’ve learned anything since the first misguided interventions in 2008, central banks don’t create wealth. They can only try and create credit by lowering interest rates. What they’ve really created is a world buckling with too much debt and not enough growth.
Category: Market updates