Fed Meeting: US Dollar Volatility & FOMC Rate Decisions

What could possibly top the Federal Reserve’s (Federal Open Market Committee) meeting to day of headlines and news? All the headlines, the headlines are all that we have to go on at this point.

Still, there’s some news to get through, no? Nothing I haven’t already heard!

Or not. Speaking of which… The beginning of the morning is always loaded with news, you know that by now.

You will recall that the U.S. Government has already announced its intention to increase any interest rate it deems necessary, given the US Economy’s steady recovery from the Great Recession. In addition, the Fed’s statement says that it will take into account the economic conditions in other countries, and “any relevant domestic factors.” It also said, “The committee anticipates that additional information, as warranted by the circumstances, may change the outlook for the federal funds rate.”

For one thing, this could very well be the time when the Fed finally decides on whether or not to raise rates at their meeting. It has been giving hints as to what it’s thinking over the past several weeks and has released statements that have reflected the question of whether or not to move in any particular direction. So, the question of how much to raise rates still remains open, and the Fed can continue to move slowly and quietly, knowing that we are experiencing a slow recovery.

And yet, at the same time, as noted, it does seem that the economy’s stable position is slowly eroding. The Fed was surprised when business investment was weak, and so it has cut its forecast for the first quarter of this year, while anticipating that growth will pick up a bit in the second quarter.

Indeed, in a speech yesterday, Federal Reserve Chairman Ben Bernanke showed some concern about the severity of the situation, because he said the U.S. economic recovery had become “fragile.” But, he also said the Federal Reserve remains confident that the economy will continue to make progress and grow, which is why the Federal Reserve is looking to ease monetary policy over the coming months.

Speaking of, yesterday’s FOMC statement shows that the FOMC sees “gains in labor market conditions and compensation,” which bodes well for the second quarter. It also sees “little evidence of significant declines in consumer prices,” which is likely to support the September unemployment rate. For example, the unemployment rate seems set to drop to 4.4% when it becomes available next month.

That said, even the stable job market, coupled with a strong housing market and consumer spending, may not be enough to offset the continued weakening of the major storehouse of the American economy. Though the Fed seems ready to weather the storm, it also sees the risk of a credit crunch, and a prolonged period of economic weakness.

A strong dollar, along with slowing growth in China, could prevent that situation from becoming even more severe. And, given the American economy’s large imbalances, a slowdown in global trade will put even more pressure on the United States’ trade deficit. Then again, the euro crisis continues to build in Europe, and that could play out in America too.

So, when you hear about the FOMC statement, don’t matter whether it was positive or negative, it’s important to keep in mind that the Fed is uncertain about its next move. If the US dollar continues to lose ground, and it’s unclear what the Fed will do, then we could very well see a stock market crash.