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Greenspan Leaves & Takes Away "Measured"

The Fed delivered its 14th 25-bp rate hike today, moving the fed funds rate to 4.50%, the highest since April 2001.

The dollar had initially rallied because markets saw little change in today's FOMC statement. As we said in our morning note, a statement that conveys little or no change will keep the door open for a March rate hike, hence further enhances the dollar's yield advantage relative to other currencies.

But the removal of the MEASURED reference may weigh on the dollar into the next 8 week period because it further opens the door for a hold in rates in March.

Recall that the FOMC modified its December statement by dropping a key reference to the strong forces of the economy ("robust underlying growth in productivity...ongoing support to economic growth"), and substituting the 19-month old "measured" reference for the pace of its policy tightening with a vague phrase that makes a January pause plausible, but still using the "measured" reference". The FOMC also phrased its statement in a way that allowed room to hedge itself for further rate hikes if the need arose by referring to: "...possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures". This also means that the fed funds rate has risen above 10-year yields for the first time since the 2001 recession. see chart.

In a little noticed change of the highly anticipated FOMC statement, the Federal Reserve removed the 20-month old "measured" reference to the way it described future policy tightening and adopted a less convincing language regarding the possibility ("may" instead of "likely" of further rate hikes) as indicated below. While the market prices a 80-85% change of a March rate hike, we expect these possibilities to recede and the Fed will stand pat in March.

Today's news of the International Atomic & Energy Agency confirmation that Iran has started preparations to resume producing enriched uranium, which can be used in nuclear weapons. This increases chances of the IAEA report referring Iran to the UN Security Council for being noncompliant with IAEA standards. We could see geopolitical strains on the US dollar in the event that the case is taken to the UN Sec Council, and further uncertainty ahead of the drafting of the Council's resolution towards Iran. The Iran headline helped trigger dollar selling, highlighted by a new 14-year high in the Canadian dollar at 1.1373. Especially threatening was the revelation that The IAEA has obtained an Iranian document which can only be used in the making of nuclear weapons parts.

Traders should encounter rising volatility ahead, partly related to emerging declarations and findings regarding Iran and the market's evolving pricing of a rate hike chance in March.


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