Friday, May 3, 2019

Rabobank fears that Fed policies are headed towards the US losing control over the dollar as the global reserve currency

As dollar shortages and an underlying global liquidity crisis spurred on the central bank to lower IOER rates during the Fed's recent mid-point FOMC meeting, analysts from one particular bank are suddenly questioning whether Powell and his Board of Governors have lost control over monetary policy.

Additionally, if this assessment should prove accurate could it also be the final death knell for the dollar's place as the world's reserve currency?


One week later, and following the Fed's admission that even it was surprised by how quickly the overnight funding market plumbing had gotten clogged up, others are starting to ask the very question we posed a week ago. 
In a note published overnight by Rabobank's Phillip Marey, the US strategist - just like us - asks "Is the Fed losing control of the policy rate system?" Needless to say, the answer could have profound implications not only for the future of US monetary policy, but whether or not the dollar can remain as the world's reserve currency in a world in which the US central bank loses the ability to set the price of money. - Zerohedge
 Below are more details from Rabobank.
What to make of the lack of a formal warning? In the first place, it means that the recent rise in the federal funds rate took the Fed by surprise. In the second place, it means the Fed thought it could not afford to wait for another six weeks. This shows that the Fed’s current framework for monetary policy implementation is not working. It has difficulty keeping the effective federal funds rate close to the midpoint of the target range announced by the FOMC. Moreover, the changes in the IOER rate present a challenge to the Fed’s communication to the public: the central bank is tweaking one of its policy rates now and then, but this supposedly has nothing to do with its monetary policy stance? What’s more, this time the Fed could not even afford to  give a formal warning to the markets. Today’s decision proves the failure of the current policy rate system. 
Therefore, the Fed’s debate about effective monetary policy implementation is likely to continue. While the current system has two floors, the interest on excess reserves (IOER) and the overnight reverse repurchase agreement (ON RRP) as we discussed back in 2015, it is lacking a ceiling. At the press conference, Powell said that the FOMC will be looking at a repo facility as a possible tool in an upcoming meeting, think about it for a while, and then make a decision. 
We take the inversion of the yield curve more seriously and we continue to expect the economy to fall into recession in 2020H2. Consequently, we think that the Fed will be forced to start cutting rates in 2020.

Sadly, printing more dollars has been the central bank's 'only solution' to every perceived problem over the past 10 years. And with the end result being that debt levels have reached untenable heights at every level of the economy (sovereign, corporate, consumer), it is beginning to appear that even the banks are fearing that the Fed has taken things to the point where they have lost control over the system, and could lead to the rest of the world to losing all remaining confidence in the dollar.

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