USD Extends Gains After Kaplan’s Comments of Higher Rates

Posted Monday, September 21, 2020 by
Skerdian Meta • 1 min read

The USD has been quite bearish since late March, with markets expecting a bigger impact in the US from coronavirus than in Europe or other places around the world. But the US economy is bouncing back faster than the Eurozone economy, that’s why the decline in the USD has stalled recently.

Employment is growing and the FED is not sounding too dovish lately, which has made traders think that the FED will probably start tightening the purse before the other major central banks. FED member Kaplan made some comments about higher interest rates if unemployment continues to decline.

Kaplan explains his dissent

  • Once US gets to the point of lower unemployment, not sure rates stay at zero
  • Costs of new low rate vow not worth the benefits
  • Says his forecast of strong growth for this year assumes some further fiscal support
  • Market cap to GDP is at historic highs and normally some kind of correction can be helpful
  • Fed still has things it could do with asset purchases and for small businesses
  • Fed is looking at ways to make the main street lending program more attractive
He has a good point on the cost/benefit. The idea is that the Fed wants to push inflation up to 2%. They got very close to doing that before the pandemic with rates at 1.50%. Do they really need money to be 150 bps cheaper to accomplish the goal? If so, aren’t they risking something far worse?
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