FX Alerts

Bernanke will stay cautious on recovery

26/03/12 @ 11:19 GMT by Michael Derks, Chief Strategist

Although two regional Fed presidents have recently warned of the risks of maintaining an ultra-easy monetary policy for too long, it is extremely unlikely that Fed policy officials will alter their commitment to unchanged rates (for the next two years) any time soon. At their last meeting on March 13th, policy-makers at the Fed slightly raised their forecasts for growth this year, although they observed that unemployment remained elevated and that there were still ‘significant downside risks’ to growth. Last week, the Fed Chairman told Congress that higher oil prices represented an additional headwind for growth.

Notwithstanding some encouraging signs on the economy over recent months, senior policy-makers at the Fed continue to emphasise that the improvement has not yet reached the point where growth is self-sustainable. New York Fed President Dudley last week correctly pointed out that roughly half of the improvement in unemployment over the past six months was due to declining labour force-participation. Dudley claimed that a rising proportion of Americans have left the labour force because they have become discouraged after a lengthy search for work or because they have accepted part-time work because a full-time job was unavailable. He also remarked on the continued weakness in housing as a sign that the economy is still struggling.

Recently, the dollar has benefitted from the encouraging news on growth and the upward revision to medium term interest rate-expectations. It remains to be seen if this shift in expectations is premature. Some respected commentators have even suggested that the Fed might hint at additional quantitative easing at its next meeting near the end of April. In our view, this seems a stretch.

Even so, the dollar is vulnerable should policy-makers’ doubts on the recovery become too audible.

Tags: fedUS

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