FORWARD GUIDANCE AND THE US DOLLAR © Leo Haviland September 23, 2013

The broad real trade-weighted United States dollar probably will remain weak. Continuing its major long run bear trend from its March 2009 high, it probably will challenge its record low of July 2011. Why?

Among assorted bearish factors, focus on two which are becoming increasingly significant. First, the Federal Reserve Board in its September 2013 meeting displayed its absence of a genuine forward guidance plan and a lack of an authentic comprehensive exit strategy. Thus marketplace faith in the Fed has declined and will do so further in the aftermath of that September gathering. Keep in mind that feeble (vague) Fed guidance and decreased confidence in the Fed occurs amidst ongoing (and long-running) gigantic money printing and interest rate repression. The central bank is doggedly determined to keep pinning the Federal Funds rate near the floor (and thus below current inflation rates and announced Fed inflation targets) for some time. So how attractive are and will be United States Treasury yields for much over much of the government yield curve? Second, America’s national political players currently display weak fiscal (economic) leadership, especially as the debt ceiling limit beckons.

The Federal Reserve Board’s overall exit strategy for its extraordinary sustained accommodative policy remains far more a sketch than a complete design or coherent practical plan. Prior to its September 2013 assembly, central bank communicators strongly hinted the Fed soon would reduce its massive money printing campaign. Yet the illustrious Federal Reserve Board generals surprised the great majority of observers by not cutting back on quantitative easing. Moreover, these Fed luminaries also underlined their flexible attentiveness to a wide array of intertwining variables which will influence their tapering and other decisions. The ever-watchful Fed thus implicitly demonstrated that its loudly-proclaimed forward guidance wordplay offers Fed watchers at best only modest enlightenment and direction. America’s central bank consequently did more than increase marketplace uncertainty. The Fed wounded its own marketplace credibility. By damaging its credibility, the Fed reduces the widespread belief that it can engineer or at least significantly influence “good” economic outcomes.

Unfortunately, the significant shortfall in forward guidance from the guiding lights at the Federal Reserve currently coincides with a badly fractured American national political scene. Of course politicians and parties disagree and compete vigorously. Yet in the United States in recent years, significant philosophical divisions, diverse and often well-entrenched interests, and quests by political players to capture attention and win elections have combined to create ongoing “overall” feeble national political leadership. Strong political individuals in combination do not necessary make a strong collective group.

Failing to satisfactorily resolve the funding and (especially) the debt ceiling issues (and related deficit spending questions) will call in question America’s political leadership as a whole. All else equal, growing doubts about the quality of that leadership (and related fiscal policies) tend to undermine confidence in the US dollar. Besides these current feuds, America’s national political leaders continue to make no progress in resolving or even significantly mitigating the country’s looming long run fiscal deficit problem. Debt crises do not occur only in emerging or developing nations or in countries on the European “periphery”.

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Forward Guidance and the US Dollar (9-23-13)