The FOMC Meeting Minutes yesterday that were released showed that the Fed remained dovish in July. This is not an earth shattering statement taking into consideration that risks continue to stir globally. Yesterday’s Crude Oil Inventories report also from the States did show less supply, but this follows two weeks of oversupply.
This morning the JPY has traded stronger against the USD. An interesting question being argued about is whether the selling of the USD versus the JPY is because of greenback weakness or a safe haven play for the Yen.
A comparison that may provide a clue is the value of Gold and its recent rise. The Fed has talked constantly about the need to raise its interest rate again this calendar year, but yesterday’s FOMC Meeting Minutes show that there is a split of opinion. James Bullard yesterday in a speech took a more dovish approach saying the Fed should wait until December, but only the day before William Dudley also an important Fed player said that the September meeting will be live – which means an interest rate hike will be discussed.
However, data from the U.S. continues to show that the economy is lackluster and needs to improve. Yes, there may be a fear of inflation that is not officially being talked about – the so called Burrito Index. The index takes into consideration the price of items that consumers buy every day, as an example at restaurants. It has shown that prices are moving higher.
Yet there is another cloud that must be dealt with, internationally many institutions fear that a rate increase will hurt American consumer spending, which would hurt countries like Germany and their exports. Deutsche Bank has publically said it is against an interest rate hike by the Fed at this juncture.
And to show you the delicate juggling act that has evolved because of the integration of the global economy, we also must consider what would happen if the Fed were to raise interest rates and made the USD stronger against the EUR, GBP and JPY. The hike would likely make these 3 currencies weaker against the greenback, which could be a good thing for the exports of the U.K., Europe and Japan. Confused? The question is just how strong the American consumer is at this juncture and how they will react to an interest rate hike from the Fed.
Safe to say central banks do not have an easy task ahead of them. While it is easy to criticize them because of the target they have on their backs, their job of helping to balance conditions in order to stimulate growth is not easy. The global economy has been suffering from stagnation. Capitalism is not easy when the system wobbles with instability internationally. This is why it may be important to return to basics and allow for real capitalism – survival of the strong to be practiced occasionally.