Notes From Underground: The FOMC statement points the all-FED criticism back at CONGRESS

Paragraphs  two and three of the FOMC statement remind all concerned that the FED has a dual mandate. In fulfilling that statutory mandate, the FED is using all tools at its disposal to fulfill that mandate. Paragraph two said, “Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.” Then in paragraph three it said: “To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate….”

Again, QE2 isn’t the FED‘s fault. We are just following our directive. This is bothersome for it’s as if the FED is pointing the blame toward Congress as the feeling seems that they are being maligned in the popular press. Is Bernanke trying to throw the ball back in Ron Paul’s hands and let him move to change the dual mandates and therefore rid the FED of any policy mistakes? The new session of Congress will provide some insight into this and the Congressional testimony of the FED CHAIRMAN will be of great interest.

An interesting development post-FOMC statement was that the 2/10 curve steepened by 14 basis points which is a very large move. The curve has been steepening post November 3, even as the FED has been buying more DEBT, flying in the face of conventional wisdom. Readers of NOTES are aware that the key date on the calendar has been August 27, Bernanke’s speech in Jackson Hole. Remember the “PORTFOLIO BALANCE CHANNEL” for it has been the driver of the reallocation of money from BONDS to EQUITIES as the S&P/U.S. ratio has moved more than 30 percent since that day.

As equities have gained so dramatically, the FED has failed to keep long rates down but as I have discussed, it is in line with the “PBC” that the FED will tolerate higher rates as long as the EQUITIES provide a positive wealth effect. As long-term rates head higher, many analysts are predicting that the U.S. DOLLAR will strengthen but I caution that STEEPENING CURVES A STRONG CURRENCY DO NOT MAKE.

Yes, I am watching the DOLLAR/YEN rally with the rising 10-YEAR rates and that is most probably a result of Japanese insurance companies seeking some higher yields. The SWISS FRANC has been a stalwart performer even as U.S. long rates have moved substantially higher and as we know SWISS interest rates are as low as Japanese rates so in the realm of currencies this is a disconnect. The precious metals were also under pressure today as the higher rates bled into the mindset of a higher DOLLAR. Again, I am not in that group and would look for support levels to enter trades to support a weaker DOLLAR view based on a steepening yield curve being a negative for a currency. I know that this is not the conventional viewpoint but that is why 2+2=5 is also a BEAUTIFUL THING. Be prepared for the market to provide you with great opportunities in holiday-thin markets.

Tags: , , , , , , , , , , ,

6 Responses to “Notes From Underground: The FOMC statement points the all-FED criticism back at CONGRESS”

  1. Michael Greenberg Says:

    I think we are transitioning from having the dollar be the funding currency to having the yen be the funding currency. If i’m correct, the dollar will rise against the yen and I’ll make some money. If I’m wrong, I’ll lose some money. So what else is new?

  2. Post-Fed – Big Picture Flatter Curve, Stronger Dollar? | Cantillon Blog Says:

    […] Yra Harris is significantly richer and more experienced than me, but on this occasion I must express a difference in opinion over the outlook for the dollar and 2s10s UST curve.  I am bullish the dollar across the board and expect curve flattening over the next year as the market and Fed come to terms with prospects for nominal GDP that surprise on the upside as regards both growth and inflation.  I think possibly the most significant period will come from February 2011 onwards, but I do think now is not a terrible time to enter dollar longs and curve flatteners with initially very wide stops on both that can be tightened up with time. […]

  3. Peter Says:


    I am a novice, but why wouldn’t a steepening 2/10 curve help make a currency stronger?

    Also, what are some reasons why some believe the curve might flatten in 2011?

    Thank you.

  4. yra Says:

    Cantillon—we don’t disagree.if the curve begins to flatten I will get bullish the dollar but by flattening the 2/10 will have to go below this years lows—but as the picture looks now i don’t see it.But as a trader I always remain adaptable to a change and I will wait.If the DOLLAR is good why are we way above the lows in the euros–118 ish even though tthe news from europe worsens

  5. yra Says:

    Mike Greenberg–that is a good point about the YEN returning as a funding vehicle –especially as Japanese funds seek higher reutrns around the globe—if the risk of global collapse is over the japanese will stop bringing money home and start shipping it out

  6. CantillonBlog Says:

    Yra – the first leg of the dollar rally (from summer 2008) was driven by collapsing dollar credit growth and a shortage of dollars in the system; I expect the second leg to be driven by a relative interest rate theme arising from positive US growth and inflation surprises. So I suppose this is much more of a broad dollar (but particularly usd/jpy) rally than purely Euro-focused.

Leave a Reply

%d bloggers like this: