Fed Will Likely Retain The Inflation Bias This Week-

by NewstraderFX
Coming at a time when Fed Chairman Bernanke is facing is first potential crisis, it will be very interesting to watch The Fed's policy play out through all of this. I would not expect to see any change in the inflation bias, although market's will be looking for any sign of change in The Fed's opinion regarding the housing/debt situation. As Bernanke clearly stated during his testimony last month, the situation is viewed as being "contained".

Former Fed Chairman Allan Greenspan would have been talking about easing by this time and it's fairly well established that Greenspan's over-easing of policy helped cause the housing/credit bubble to begin with. Ben Bernanke operates in a very different way then his predecessor. Greenspan was much more of an intiutive, seat-of-the-pants type, while Bernanke's academic and research background leads him to rely on history, models, projections and mathematics. If Bernanke were to paraphrase the former chairman, he might use the phrase "Immoderate Indulgence" to describe what had existed before all this blew up.

In my opinion, Bernanke will not be easing policy or changing his statement based on what he likley sees as a necessary adjustment to the "immoderate indulgance" despite the fact that people are going to be hurt in the process, because it's likely that the "biting of the bullet" that will occur now is probably the best chance for assuring the long term health and stability of the economy. Economic leaders from Central Banks, the IMF and the BIS have long warned against the excesses they saw in the markets, making the current situation of the "chickens coming home to roost" variety in their view.

If the Fed were to alter its "contained" opinion now, markets would certainly feel supported and would interpet the remarks as indicating The Fed is that much closer to a rate cut. While the underlying problems would still exist, markets would see a light at the end of the tunnel and that might be enough to avert further serious declines in equity markets. What that would also do is further weaken the dollar (due to renewed risk appetite) and possibly ease the present constraints on liquidity.

Since I don't believe that will happen this week further aversion of risk is likely to prevail, with the most likely outcome to be dollar strengthening vs the high yeilders as carry trades unwind with equities.