SpotEuro Forex Daily Outlook October 22, 2010

THE CALM BEFORE THE STORM. Just a few hours ago, Federal Reserve Bank of Kansas City Hoenig made some statements that seem very bullish for the dollar. How will the market interpret these comments? What will be the outcome from the FOMC meeting November 3rd?

Here is a summary of his statements.

- Increase in US savings rate is a positive development for long term economic prospects.
- Very "unhappy" with the unemployment rate at this time though trying to reduce it too quickly can create additional problems.
- Zero interest rates are appropriate in a crisis but not in a recovery.
- Not in favor of high interest rates in this fragile recovery.
- 0.5% to 1% rates are still "very accommodative."
- If you wait to raise rates until there is certainty that all is fine in the economy, than you have waited too long.
- Additional easing would require "fine tuning" of inflation expectations and is highly risky.
- QE could be seen as monetizing the debt.
- Excessive liquidity can lead to "very bad outcomes."
- US is part of the global economy so must be mindful of policies in other countries.
- Fed held mortgage paper should be allowed to roll off.
- Does not think the US is in a liquidity trap because US is actually growing and will continue to grow.

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