10:16 AM PST — I am writing right now about an hour before the US Federal Reserve announces what it will do regarding interest rates, along with a hopefully detailed forecast of what is to come. Some of my colleagues (cough… John… cough), have come to the conclusion that the Fed will shock the markets and raise rates. When considering if perhaps I should also predict that an upset is in the making, I think back to a boxing match a little over a year ago. In the days before the match between Floyd Mayweather Jr. and Oscar De La Hoya, the public actually began to favor De La Hoya, despite the fact that Mayweather was younger, faster, and quite simply, better. However, everyone loves an upset, and as a result, my next door neighbor took advantage of the incorrectly skewed betting odds. My neighbor made several thousand dollars that day, and because of that story, I’m ignoring the suddenly numerous voices who are now saying that the Fed will surprise the world.
10:33 AM PST — With about forty minutes to go, I just can’t believe that anything will happen… I still think that the Fed will hold rates while trying to deliver hawkish commentary at the same time. Advice of the day: bet on the event that’s more likely, not the event that you want to happen. As much as the Fed would love to raise rates right now (which would likely be the best thing for US inflation), virtually all of the economic data released in the past few weeks have one thing in common: disappointed results. I just can’t see how the Fed can justify chasing after inflation when the economy seems so weak.
11:31 AM PST — To quote Alec Baldwin in 30 Rock, “Oh happy day!” Sure, I’m currently happy mostly because of my bank account, but let me put that aside. The Fed did what it had to do, and something which Bernanke is not accustomed to — restraint. I applaud the Fed for abstaining from putting additional strain on the economy.
12:02 PM PST — The rally has definitely slowed, but it’s likely that it will pick up at a slower pace within the next hour or two.
2:16 PM PST — So now that the market has stabilized, we can asses the damage done to the USD. The EUR gained about 100 pips thus far today against the greenback, the GBP is up about 40 pips and the JPY up only 10 (don’t get me started on the yen). All in all, the effect of the announcement was short-lived, and didn’t provide as much of hit to the USD as might have been expected. This more muted effect is likely due to the majority of the market having correctly anticipated the Fed’s stance. In the upcoming weeks, we have similar announcements from the ECB and the BOE. Hopefully this will liven up the market and provide for interesting debate and speculation. So, looking back on today, we arrive back at the lesson I discussed several hours ago: If you’ve got a sure thing, stick with it until the end, as there will always be people who flip at the last moment. Don’t be one of them!
USD Gross Domestic Product (Annualized) (Q1)
NZD Gross Domestic Product (Q1)
NZD Trade Balance (May)
JPY National Consumer Price Index (May)
JPY Household Spending (May)