A Change of Policy From the Fed?

Last updated 10/9/2009 4:50 AM ET (GMT -5) 3 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Fed Chairman Ben Bernanke stated last night that the US central bank will be ready to tighten monetary policy as economic conditions improve prompting a reflex rally in the dollar especially against the yen. The Chairman said, "When the economic outlook has improved sufficiently, we will be prepared to tighten the stance of monetary policy and eventually return our balance sheet to a more normal configuration."

Although the remarks by Chairman Bernanke were not new and the Fed chief made no hints that a move towards tightening will come any time soon, currency traders reacted to his rhetoric bidding up the dollar in Asian and early European trade. The yen was the biggest loser amongst the majors with USD/JPY rising above the 89.00 figure as markets reassessed the long term viability of the dollar carry trade.

Is the Fed truly changing course? We think such talk may be premature. We believe that the Fed will follow its historical precedent and will not raise rates until the labor markets no longer contract. Yesterday’s drop in the weekly jobless claims numbers was a welcome sign of improving conditions, but until the weekly numbers drop into the 400,000’s the US economy is likely to continue losing jobs which will keep the Fed stationary for the foreseeable future .

We believe that the rhetoric from Chairman Bernanke, was simply meant to restrain the pace of decline in the dollar after the buck weakened to fresh yearly lows against many of its major trading partners this week. The fate of the dollar and the direction of the US monetary policy will depend on the return of consumer demand which remains moribund for now. Next Wednesday’s US Retail Sales numbers could prove to be the critical event risk of the week. If they surprise to the upside, Dr. Bernanke’s comments would become considerably more credible and the dollar bounce could have more legs.

Comments (3)

Semaj

October 09, 2009 at 07:34 AM ET

B, what do you, and others most likely, think real unemployment is at. How does the market consider people that come off benefits but don't actually find a job.Could this be the untold truth among opinions of where we go from here for the next year in terms of economic recovery in the U.S..

bschlossberg

October 09, 2009 at 10:15 AM ET

Yes that's a good point and we'll have to see how it weighs on US economy going forward

spunky

October 11, 2009 at 08:01 AM ET

I would guess closer to 12% and how about the underemployed ? I work in healthcare ; that magical sector and you would'nt believe how jobs have tightened up in the last 2 yrs.

We (US) are still producing goods and services with fewer workers than before, companies have streamlined and with fed-ex and UPS and other modern ways( tech ) to keep lower inventories, the rebound everyone is looking for is going to be a dead cat bounce. Meanwhile you will see a divergence or decoupling from of western europe, USA , with asia , south america and other frontier markets; all the while; the buck will continue to fizzle, crude oil and gold and other PM's will rise, as China slowly diversifies away from the buck.

Our government will continue to raise sin taxes, income taxes and helicopter Ben will keep rates low, while little Timmy, Hank and his boys in lwr Manhattan find a way to create another bubble, and blame mainstreet because we no longer trust wall street.

I wish I had a rupie for every email I sent to Dick Lugar , Evan Byah, and Brad Ellesworth , about canning Ben, and Timmy and the boys/girls : {

Still at 43 yrs old, I cant figure out if our elected officials are just crooked or plain stupid

You must defend king dollar !!!!!!

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.