WSJ Hilsenrath’s article and our take on forward guidance
An article from WSJ Fed-watcher Hilsenrath overnight weighted further on US yields, hurting the USD. It suggested the Fed could introduce more dovish forward guidance, e.g. lowering the 6.5% unemployment rate threshold for hiking the fed funds rate. The report should continue to weigh on USD in the lead up to the FOMC statement release (Wednesday evening) as the market always reacts to Hilsenrath’s articles as he is considered to have strong “sources” at the Fed. While most of the article appears nothing out of the ordinary (on hearing Bernanke’s latest testimonies), what stands out is that the Fed may consider a “lower bound” for inflation as well i.e. not raise rates unless inflation falls below some threshold, “perhaps” 1.5%. If the market catches on to this, it could hurt USD further today and into next week. BNP Paribas economists view that any change in forward guidance (WRT unemployment rate) would come either a) in conjunction with actual QE tapering and thus probably not until September or b) along with formalizing the tapering message in the statement, which could happen as early as next week.
Read the full report: FX Daily
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