Skepticism About Fed Promises

The greenback rose against most major currencies after the Fed’s unexpected rate hike pared risk appetite. The dollar pared gains vs. the euro as data showed that the US cost of living rose less than forecast. Prices, excluding those for food and energy, declined for the first time since 1989. The Japanese yen gained vs. the South African Rand and the Kiwi dollar after the Fed’s actions pushed Asian stocks 2% lower. Boris Schlossberg of GFT Forex in New York stated, “We had a shock to the system yesterday with the Fed’s discount rate hike. The first reaction was to take risk off the table.” Despite the Fed’s repeated promise to keep rates low for ‘an extended period’ skepticism if growing in financial markets about the Fed’s promises. Sumitomo Mitsui Banking Corp. said the Fed’s move was a “misjudgment of historical proportions.”

Fed Says Moves Will Not Lead to Tighter Financial Conditions For Borrowers

Tokyo strategist Daisuke Uno said that the Fed’s rate increase “won’t produce any positive effects.” Many experts believe that if US economic conditions deteriorate that the US which depends on foreign money to fund its deficit could experience “an unsavory rise in interest rates.” The Fed said its moves were intended “intended as a further normalization” of lending and that the “modifications are not expected to lead to tighter financial conditions for households and businesses” and do not indicate any change in monetary policy. Some analysts believe the Fed may have raised rates as a method of “protecting the dollar in case China takes a retaliatory step, such as cutting the amount of U.S. government debt it buys amid heightening tensions between the two nations.” The dollar reached a nine month high vs. the euro as many investors believe the rate hike is a clear indication that the Fed intends to withdraw emergency stimulus measures.

Fed Tightening Policies says Expert

Federal Reserve Bank of St. Louis President James Bullard said that fears of an increase in borrowing were ‘overblown, while Atlanta Fed President Dennis Lockhart said that the rate hike does not indicate a tightening of policy. Andrew Busch of Bank of Montreal in Chicago said, “The CPI report adds some credence to the commentary from Bullard and Lockhart. But when the Fed raises an interest rate, even the discount rate, it’s tightening policy. The U.S. is attempting to exit extreme monetary policy looseness. That should boost the dollar versus the euro.” The euro remains pressured by continuing concerns about the nation’s ability to implement austerity measures to address the ongoing fiscal crisis.