Federal Reserve policy makers have defended their September 18th actions as being “preemptive”, as even Fed Chairman Bernanke remains concerned that the market’s recovery may take quite a bit of time. However, with inflation risks mounting amidst the massive depreciation of the US Dollar and prices for energy and food rocketing higher, it appears that the FOMC may not have the option of loosening monetary policy further and explains why futures are only pricing in a 36 percent chance of a rate cut on October 31st.
US Fed: Will The Weak US Dollar Prevent The FOMC From Cutting Rates?
Federal Reserve policy makers have defended their September 18th actions as being “preemptive”, as even Fed Chairman Bernanke remains concerned that the market’s recovery may take quite a bit of time. However, with inflation risks mounting amidst the massive depreciation of the US Dollar and prices for energy and food rocketing higher, it appears that the FOMC may not have the option of loosening monetary policy further and explains why futures are only pricing in a 36 percent chance of a rate cut on October 31st:
Ben Bernanke, Federal Reserve Chairman (Voting Member)
“By doing more sooner, policy might be able to forestall some part of the potential adverse effects of the disruptions in financial markets.” – October 16, 2007
“Conditions in financial markets have shown improvement since the worst of the storm in mid-August, but a full recovery of market functioning is likely to take time, and we may well see some setbacks…The ultimate implications of financial developments for the cost and availability of credit, and thus for the broader economy, remain uncertain. For now, the Federal Reserve will continue to watch the situation closely and will act as needed to support efficient market functioning and to foster sustainable economic growth and price stability.” – October 16, 2007
“One cannot deny that when the US Dollar depreciates there is some inflationary impact.” – October 16, 2007
Janet Yellen, Federal Reserve Bank of San Francisco President (Non-Voting Member)
“The Fed’s larger-than-usual rate cut on September 18 was forward-looking and preemptive.” – October 10, 2007
“…we do still face some inflation risks, mainly due to faster increases in unit labor costs and the depreciation of the US Dollar, and these will need to be watched carefully…the US Dollar’s decline has had surprisingly little impact on import prices and will probably continue to do so as long as inflation expectations remain well anchored.” – October 10, 2007
William Poole, St. Louis Federal Reserve Bank President (Voting Member)
“The September employment report does not suggest that the downside risk is occurring.” – October 10, 2007
“The depreciation of the US Dollar is something that we cannot explain…I do not see any implication for inflation, at least with the magnitude of the depreciation that we’ve seen so far. I did not see any evidence of a raft of US Dollar price increases for foreign goods, with the exception obviously of commodities…But for manufactured goods, I think the pass-through is very, very small.” – October 10, 2007
ECB: Disciplined Rhetoric Highlights Focus On Inflation
As European Central Bank President Trichet has said himself, monetary policy makers have an obligation to apply “verbal discipline.” Though it appears that the ECB may be more neutral than they’ve been in a long time, various policy makers have made a point of noting that they remain focused on their primary mandate: price stability. As a result, until CPI falls significantly below the 2.0 percent target, there is very little chance that the ECB will even consider cutting rates from their current level of 4.00 percent:
Jean-Claude Trichet, European Central Bank President
“[The ECB’s] baseline scenario calls for growth to continue to be robust in the Euro area and to hover around potential … we have to gather further information to make a definitive judgment.” – October 11, 2007
“We are in a universe where you can say anything when you aren’t in a position of responsibility, but when you are in a position of responsibility, it’s very important to apply verbal discipline.” – October 15, 2007
“I have nothing to add or withdraw from what I have said in my last press conference after the meeting of the ECB Governing Council in Vienna on Oct. 4. I call on all partners in Europe, in the executive branches, to be highly responsible and to demonstrate verbal discipline.” – October 16, 2007
Juergen Stark, European Central Bank Executive Board Member
“We haven’t seen any clear sign of weakening in the economy. We are in an information gathering stance, and we will make our assessment based on this new information.” – October 12, 2007
Axel Weber, European Central Bank Governing Council Member
“Monetary policy can be accommodative, meaning it can support the economy in certain phases of the cycle, as long as the mid-term inflation expectations are in tune with price stability targets. But if risks to price stability threaten to materialize, monetary policy must not lose sight of its primary mandate – even if it can thereby no longer support the already robust economy, or even restricts it.” – October 12, 2007
John Hurley, European Central Bank Governing Council Member
“With regard to inflation, the euro area headline rate moved above 2 percent in September and is expected to remain above that level into the early part of next year.” – October 12, 2007
Written by Terri Belkas, Currency Analyst for DailyFX.com