Becky Currency Thoughts | Expert friendly blogg

FOMC Preview

In the six weeks since the last scheduled FOMC meeting, the dollar has edged up 0.2% against the yen and 0.8% versus the euro. It’s been a period in which Fed officials have prepared markets rhetorically to expect an interest rate cut today, so it’s somewhat surprising that the 10-year Treasury yield is now only five basis points lower than when the last meeting’s decision was announced and no different from the level at which it closed that day. Over these six weeks, the biggest market reactions to a likely easing in end-July have been a 9% increase in the price of oil and a 3% advance in the DOW.

At one point in these six weeks, the possibility that the FOMC might even cut the interest rate by 50 basis points gained some favor, but such a move is now considered less likely than a cut of 25 basis points. A big area of suspense involves forward guidance. Will today’s move be framed as the first of several or one that only will be augmented down the road if forthcoming data warrant more easing?

Several other central banks have cut rates recently, and both the ECB and BOJ have adjusted their forward guidance to suggest easing in the future. If most central banks ease in tandem and if the Fed is seen to be doing the White House’s bidding, the Treasury yield curve would be apt to steepen, but the dollar might weaken not so much because of interest rates — differentials would not change much — as in reaction the Fed’s eroded credibility.