Enigma Solved, Not Yet

    Prior to Wednesday’s meeting the Fed has little room to wiggle.  The inflation readings of CPI and PPI are extremely high, while other economic indicators are signaling recession.  Let us overview the news that evidences a recession bound economy.  The Richmond manufacturing index is down a lot, home price index is down, and consumer confidence is down.  There is no light at the end of the tunnel and the Fed is backed into a corner.  Two weeks ago on June 9 Bernanke said, “The risk that the economy has entered a substantial downturn appears to have … diminished over the past month or so.”  Does this signal that the FOMC will raise rates; not likely.  I analyzed this question in a prior post, the Fed will take a prudent course and talk hawkish while hoping inflationary pressures subside.  The fact that the economy is tipping into a recession juxtaposed with high inflation puts the Fed in a precarious position.

    Why is the economy tipping into recession?  Well the above listed reasons, unemployment at 5.5 percent, and stagnant growth among numerous sectors.  How does the Fed fight inflation?  Hike interest rates, and how does the Fed fight recession?  They lower interest rates.  Do you see the conundrum?  With the above statement the Fed is perceived as changing their concerns from growth to inflation.  To reiterate my last post the Fed will do nothing and talk tough, which is expected.  The indecision that has plagued the market for two weeks will persist, unless the Fed makes a commitment.  If they do then the dollar will rally, if not look for steep losses.  If the Fed even acknowledges growth as a concern then the dollar will slide.  This market is based on expectations and sentiment, and right now Fed is an enigma.  Clarity of the issue is needed and the Fed better step up to the plate and clarify their position.  The market will eventually decide for them if they remain ambiguous.  The indecision could last until June 7^th when Trichet & Co. and the BOE meet.  There actions could shed light on the situation which will result in traders taking a position.  For dollar bulls it could be a long week if the Fed remains neutral. 

    Poor FOMC because of today’s numbers, the trough of the housing bubble is far from reached, and a depreciated currency hasn’t lead to increased manufacturing, and consumer confidence has fallen again.  Best of luck trading the most watched event in Forex if you’re like me you’ll be glued to the television tomorrow at 14:15 EST, trying to gauge Bernanke’s thoughts.  He might be thinking, “Darn I miss my cushy position at Princeton.”