.
By Shavasb Bohdjalian
All eyes will be on Fed Chairman Ben Bernanke's first post-meeting news conference after a two-day meeting of the U.S. Federal Reserve's policy-setting committee, which will be concluded on Wednesday.
Most investors already anticipate the Fed's bond and interest rate announcement. Attention will quickly shift at 9:15 p.m., when the Fed publishes its latest economic projections and Bernanke begins an hour of questioning from reporters.
Investors will be listening closely to the Fed chief's words and watching his body language, looking for hints to when rates may increase in order to contain inflation.
In his press briefing Wednesday, the Fed chairman is expected to confirm that QE2 will wrap up as scheduled on June 30. He probably will say again that the economy has shown signs of a self-sustaining recovery. But he is unlikely to indicate when the Fed will hike short-term interest rates to fend off inflation. Bernanke is expected to take a cautious approach to raising rates until he is sure that risks of deflation are minimal. Despite at least two inflation hawks on the FOMC calling for rates to rise right away, the chairman has plenty of support from other members. So the Fed will not make any big moves until Bernanke and his allies feel sure they are ready.
Bernanke is likely to reiterate the dominant view at the Fed that higher prices for oil, grains and other global commodities will have a temporary impact on U.S. consumer prices–like what happened in 2008–allowing the Fed to keep rates close to zero for a while. All else being equal, such remarks tend to weaken the dollar as investors switch to currencies that offer higher yields.
Bernanke told Congress last month, "Until we see a sustained period of stronger job creation, we cannot consider the recovery to be fully established." While the unemployment rate has fallen from its peak at 10.2%, it remains well above normal recession highs. Given current trends, it may not fall to 8% until sometime next year. Perhaps then the Fed will clearly signal that short-term interest rates are headed higher.
Comparisons are likely to be drawn with the European Central Bank, which raised its key policy rate to 1.25% April 7. The ECB's inflation outlook differs from the Fed as it views the higher commodity prices will result in companies passing on higher costs to consumers. More ECB increases are likely as early as June.
In March, consumer prices rose by an annual 2.7% both in the euro zone and the U.S. The underlying inflation rate that strips out food and energy, a figure more closely watched by the U.S. central bank, stood at 1.2%, within the Fed's comfort zone.
At the same time, Bernanke is likely to use the press briefing to convey the Fed's determination to raise rates if prices look set to rise above its informal target of just under 2.0%. Comments to that effect would benefit the dollar, noted Wall Street Journal analysts.
So in other words, the direction of asset prices including shares, commodities, currencies and bonds will depend to a large extent on what the Fed Chairman has to say on the Fed’s accommodative stance.
The best strategy would be for Bernanke to say that after June 30th, the Fed will act based on the flow of data and depending on the improvement in housing and unemployment. If he does that, I believe all asset classes will enter into a two-way ranges trading, with the top already in place. On the other hand, if he says that the Fed will continue to inject liquidity even after June 30th, then it will be a sign that Bernanke wants the equity and commodity bubble to continue longer and will be a green-light for markets to buy equities, commodities and sell the dollar.
www.eurivex.com,
[email protected]
(Shavasb Bohdjalian is an approved Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10. The views expressed above are personal and do not bind the company and are subject to change without notice. Investing in markets and trading on leverage is highly risky and it may not be suitable to all investors since it carries a high degree of risk and you can lose more than your initial investment)
