While Kansas City Fed President Esther George said she had been "disappointed" by the decision not to begin tapering stimulus she was the lone dissenter at the last Fed policy meeting. But George has also noted and that the Fed has undercut its credibility by delaying what everyone was anticipating and what was seen as widely telegraphed for months. On the other hand St. Louis Fed chief James Bullard, defended the decision, saying low inflation allowed time for payroll and employment data to pick up. He argued that the Fed’s decision to leave policy unchanged enhanced credibility by showing the decision was data dependent and not automated. He also said that Fed policymakers could still decide to start reducing bond buying in late October, if inflation and unemployment data support the move.
But even after last week’s shock decision left reading the tea leaves decidedly messy, October is looking less likely at this point. While there will be more employment, housing and retail data to support one decision or another, the debt ceiling and budget showdowns are going to cost the U.S. economy. Coming into next year we are also going to have a very different Fed. Perhaps one that given the time left for several current governors and indeed Chairmen Ben Bernanke would prefer to make their own decisions.
For FX markets, that leaves a clear signal, the dollar’s long term fundamentals are intact as we note repeatedly. But with no tapering, it may also stay flat or weaken a little for at least this quarter. Perhaps this is not a terrific time to make trading bets on the greenback.