{"id":50904,"date":"2019-12-16T00:56:49","date_gmt":"2019-12-16T08:56:49","guid":{"rendered":"https:\/\/drduru.com\/onetwentytwo\/?p=50904"},"modified":"2019-12-17T19:41:41","modified_gmt":"2019-12-18T03:41:41","slug":"us-dollar-wavers-in-the-wake-of-fed-dovishness","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2019\/12\/16\/us-dollar-wavers-in-the-wake-of-fed-dovishness\/","title":{"rendered":"U.S. Dollar Wavers In the Wake Of Extended Fed Dovishness"},"content":{"rendered":"\n

U.S. Dollar Breakdown<\/strong><\/h3>\n\n\n\n

In the wake of the Federal Reserve’s last pronouncements on monetary policy, the U.S. dollar index (DXY) sold off and confirmed its latest breakdown below its 200-day moving average (DMA).<\/p>\n\n\n\n

\"The
The U.S. dollar index (DXY) confirmed another 200DMA breakdown.
Source: TradingView.com<\/a><\/strong><\/figcaption><\/figure><\/div>\n\n\n\n

This latest 200DMA breakdown looks more damaging than other episodes. For example, the U.S. dollar index extended further below its 200DMA than in other episodes. The U.S. dollar index also failed to make a new high after the last breakdown. A close below the June low would confirm a new bearish turn for the dollar.<\/p>\n\n\n\n

In Search of Inflation<\/strong><\/h3>\n\n\n\n

I read through the transcript of the Fed’s press conference<\/a> for clues to help me understand the dollar’s dive. One statement in particular caught my interest as it suggested the Fed will not even consider increasing interest rates for the foreseeable future:<\/p>\n\n\n\n

“…in order to move rates up, I would want to see inflation that’s persistent and that’s significant, a significant move up in inflation that’s also persistent before raising rates to address inflation concerns. That’s my view…We haven’t tried to turn it into some sort of, you know, official forward guidance. It happens to be my view that that’s what it would take to want to move interest rates up in order to deal with inflation.” <\/p> Jerome Powell, Federal Reserve Chair, Transcript of Chair Powell\u2019s Press Conference<\/a> December 11, 2019 <\/strong><\/cite><\/blockquote>\n\n\n\n

Depending on your perspective, inflation has not moved up significantly nor persistently since before the Financial Crisis, maybe the 1980s. With such a history, inflation is not likely then increase significantly or persistently anytime soon. Powell’s claim implies that the Fed funds rate will not go higher for a very long time to come. <\/p>\n\n\n\n

The Federal Reserve uses the Personal Consumption Expenditures (PCE) index as its measure of inflation. The Fed has a 2% target for inflation. The chart below shows that PCE has stayed below <\/strong>2% for the vast majority of the time since 1992. I included the trimmed mean PCE as the Fed sometimes refers to this alternate but complementary measure of inflation<\/a>.<\/p>\n\n\n\n

\"The
The Personal Consumption Expenditures vs Trimmed Mean PCE Inflation Rate both confirm that lack of persistent inflationary pressures since at least the Financial Crisis
Sources: U.S. Bureau of Economic Analysis, Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index) [PCEPILFE], retrieved from FRED, Federal Reserve Bank of St. Louis<\/a>, December 14, 2019; and Federal Reserve Bank of Dallas, Trimmed Mean PCE Inflation Rate [PCETRIM12M159SFRBDAL], retrieved from FRED, Federal Reserve Bank of St. Louis<\/a>, December 14, 2019. <\/strong><\/figcaption><\/figure><\/div>\n\n\n\n