Why the FED has continued the rate hike rhetoric in spite of
weaker data?
The question that baffled me for the last 2 months can
perhaps be answered by the financial conditions index (FCI). FCI takes into
account the exchange rate, bond yields, credit spreads and equity markets to
ascertain whether the financial conditions are pro growth (loose) or anti
growth (tight). A look at the National FCI index published by the Chicago Fed
shows that financial conditions have continued to ease in spite of the Dec and
Mar rate hikes and is the loosest levels since 2014. FCI indexes of other global
banks also paint the same picture indicating that the FED might want to
continue on the tightening path in spite of weaker data. This is no surprise as
a June rate hike is priced in.
But what it means is that the FED might not be as dovish
next week in the FOMC, as the recent data might suggest leading to dollar
strength post FOMC (where a rate hike is a foregone conclusion).
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