Morning Commentary: Steady Policy but for How Long?
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
Steady Policy but for How Long?
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David Atkinson Foreign Exchange Sales Manager
Clearly, the most important issue facing the markets this week is the Fed’s Federal Open Market Committee (FOMC) two-day meeting, which begins today. Tomorrow’s statement and ensuing press conference featuring Fed Chairman Jerome Powell will draw the attention of market analysts looking for indications of any change in future policy from the policy-setting committee. Typically, the period just before any FOMC is quiet as markets await further direction on interest rates and the implications for future monetary policy. This week has been no different. Ten-year yields are basically unchanged even as a string of generally positive data and better earnings numbers substantiate an optimistic view of a reviving economy. How much longer can the Fed be patient? Past indications have been that the board is firmly resolved to an accommodative monetary policy until such time as they are confident that the objectives of full employment and an inflation target of 2% are solidly in place.
All of this comes against a backdrop that has some 80% of companies reporting quarterly earnings meetings or beating expectations. Commodity prices are soaring. Copper, a keen indicator of economic strength, is at the highest levels in a decade. Agricultural products, including wheat, corn and soy, are showing rapid price increases. OPEC+ has predicted increased demand for oil after a temporary hit due to reduced need in India as the country deals with a growing COVID-19 crisis. Many in the market read these events as temporary conditions, but that may change. Some analysts are now predicting that the FOMC may move to taper the quantitative easing program as early as the fourth quarter of this year.
For now, the uneven economic recovery continues. The Dow’s transportation index is stronger for 12 straight weeks, restaurants are having difficulty reopening as workers are hard to find and the increased desire to travel by Americans finds shortages of rental cars. Yet many Americans remain out of work or underemployed. The Fed’s decision this week will carry implications into the days ahead as they walk a fine line between ensuring a strong economic recovery and elements that could call for raising rates sooner than anticipated.
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