Monetary Policy (Finally) Shifts – Now What?

Yesterday, in a move more telegraphed than a Jay Cutler Pick 6, the Federal Reserve Board voted unanimously to raise the Fed Funds target rate by 25 basis points. Market watchers, and this blog’s audience don’t need a weatherman to tell them which way the wind blows.

The question, as always is – what’s next? The “dot plot” points to a series of four (4) quarter point hikes over the course of 2016. We will see if the U.S. and Global economy remains on terra-firm, allowing the Fed to follow through on their rate normalization course.

The market is a forward-looking/discounting mechanism and if you look at the Trade Weighted U.S. Dollar Index, you can clearly see the anticipation of monetary tightening in the U.S., particularly over the past 18 months.fred

Pivots in the U.S. Dollar Index have come at some critical times over the past few decades. The most recent lows coincided with peak commodity prices in Q2 of 2011 – following the Arab Spring. The most recent top in this index was the second week of March in 2009. That happens to be the same week that U.S. Equity markets made their bear market lows (S&Ps ~666, RUT ~343, NASDAQ ~1,265). I am in no way calling a top in this currency barometer, but I do believe the relatively outperformance of the U.S. Dollar merits attention because of the considerable knock-on effects.