An over-valued dollar: how the fed reached an impasse

Two years ago, an event occurred which very long expected in world markets, and which was to turn the page “dealing with the consequences of the crisis of 2007-2009”.

We are talking about the fed’s decision, adopted at the meeting of the Federal open market Committee, the transition to the “normalization” of interest rates and reduction of balance of the regulator.

Hawkish forecast

The main consequence of this decision was the expectation of rising rates in the U.S. and the associated rapid growth in the value of the dollar, falling commodity prices (oil, primarily) and most of the currencies of developing countries.

Among other information, which was published following the meeting, present a table of expectations of fed members about what level of interest rates and the year in which they suggest to move to traditional monetary policy. Looking at her, it was possible to conclude that by the end of 2016, the key interest rate the us Central Bank is closer to 3% (forecast 2.7%).

Based on this fairly hawkish forecast the markets and was corrected — the dollar surged, and assets fell.

According to the results of the least “affected” stock market — U.S. indices after several significant failures in the last two years (15%) remain in positive territory in relation to the period up to September 2014.

Was able to “recover” the Brazilian real, the value of gold, and even slightly won.

Oil, however, are “stuck” at a low level corresponding to a very expensive dollar.

However, for the same two years in the markets fatigued and began to form a distrust of desire, and now, and to the ability of the fed to carry out the declared program of “normalization of policy”. And for good reason.

Inconclusive increase

First, two years the rate was raised only once — in December 2015 and only 0.25%. The fact was accompanied by a deafening buzz in the media. Headlines like “farewell to the era of cheap money…” have filled the analytical publications.

However, markets gave a rather cool reception to the very fact of a rate hike began to grow gold, the dollar index, on the contrary, began to fall. Protracted for the entire 2015 waiting ended not too convincing action by the fed.

Second, for 2016, the market belief that the fed will still raise rates up to a stated level gradually melted. A higher key rate, in General, did not predict its lift in the foreseeable future (2-3 years) higher than 1%.

Third, the fed itself does not show its former “hardness”. His former head Ben Bernanke spoke about the fact that negative rates are not such a great evil. A similar view was expressed by one of the acting presidents of the regional reserve Bank. From meeting to meeting, the fed’s accompanying material is gradually reduced the level of “normal” rates close to 2.5% (with a stated 3.7 percent).

It is possible to result many arguments and the beginning of the gold rally, and problems with the growing debt, and the dependence of balance of payments from capital flows and “overheating” of the stock market, which for two years trying to “move on up, but is afraid.

Dollar on the verge

Ultimately, everything depends on the likelihood of further growth of the key rate and the consequent preservation of value of the dollar at current levels. After all, if the rate does not go further up, the value of the dollar will not long resist. The dollar raised in 2014 almost 25%, “act” expectations at a rate of 2.5%-3% in 2016, which has not happened. And, with high probability, will not happen in 2017.

Most importantly, what keeps today from a large-scale correction of the dollar, it is the policy of negative rates the ECB and Bank of Japan. But even the Herculean efforts of these two regulators seem to have exhausted the possibilities for weakening of their national currencies — the yen and the Euro, at least not fall past year and a half. Moreover, they show a tendency to increase.

If the dollar begins its accelerating decline, to stop it can only be quick and significant raise the key rate. But then — guaranteed recession in the United States.

In other words, speaking about the current policy of the fed and the prospects of raising rates, and I want to say — “If the king is not naked, at least not completely dressed…”

The authors ‘ point of view, articles which are published in the section “Opinions” may not coincide with ideas of editorial.