If we look at the big sell-off in the dollar, the answer to the question in the headline is a definite YES. Retail sales and inflation data are undoubtedly top-tier figures. However, when the data is released on Fed-day, the reaction is usually muted.
Not this time.
Update: Fed raises rates, leaves dots unchanged & Yellen is optimistic – USD recovers
The drop in core inflation to 1.7% is quite alarming. The Fed may have received the data in advance, but it is too late to change the guidance before the decision. However, they can still change their mind about the rate hike.
We had already cast doubts about the rate hike in June. It just doesn’t make sense to tighten monetary policy.
- Wages are stuck at 2.5%
- The Core PCE Price Index fell to 1.5% in April.
- Growth was only 1.2% annualized in Q1 2017.
- And now Core CPI continues dropping in May.
In addition, retail sales figures were quite disappointing. The US economy is based on consumption and this base does not look good.
If they change their minds?
A postponement of a rate hike will be a welcome acknowledgment of reality, but also a sign of unconfidence.
Not only will the Fed have shown it is unsure of the economy, but the last minute U-turn could keep markets on edge.
This implies an extension of the current fall in the US dollar.
A change by the Fed about this decision also has implications for future decisions. The optimistic scenario is that the Fed just pushes back the hike to its next big meeting in September. However, if things are bad now, they can stay this way for quite some time. A pushback to December or beyond.
What do you think?
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