While the decisions of the FOMC and implementation of easier policy have led to lower interest rates across the yield curve, it has not been very effective in lowering the relative value of the US dollar. The dollar has traded quite resiliently despite the lowering of rates in the U.S. I believe the Fed going on hold here is a hawkish turn in policy that markets will not like and will result in continued USD appreciation. The main headwind which was a dovish pivot in policy has passed and it was an insurance series of cuts or a mid-cycle adjustment, as Powell said initially, rather than the beginning of a long or significant easing cycle.
I believe the global economic malaise has not yet bottomed. The U.S. economy though will likely not further deteriorate prompting the Fed to stay on pause as they have signaled. It would take a dramatic downward assessment in the US data to move to lower rates again. Monetary policy acts with long and variable time lags and I think the US data will start improving as an easier policy sets in. U.S. manufacturing may be bottoming out but the global picture should continue to worsen.
This last rate decrease and the forecast for lack of future interest rate policy changes were a hawkish turn in monetary policy in my view. The Fed just lowered interest rates three times in a row with unemployment at 50-year lows and stocks near all-time highs. Remember, when they were raising rates it was an increase at every other meeting. So essentially, the Fed just suddenly loaded up on accommodation at a very interesting time and then said we're done for now.
I think they see a major problem in the global economy mainly emanating from China and an offshore, global U.S. dollar shortage. By lowering rates they are acting against a more serious global downturn and trying to keep the dollar down. Now though, the Fed has used up their willing firepower and just gave a lot of strength to the USD because of their now-on-hold policy, return to US data dependency and the forecast for lack of future rate decreases.
I don't expect a US recession by any means and in fact I think an upturn in the US data will prompt the Fed to stay on hold while the global economy, particularly emerging markets and Europe, hit somewhat of an air pocket or sharp drop in altitude in the background. Expectations for a long easing cycle were depressing USD strength. With the Fed now out of the way for USD bulls and no real depreciation of the USD currency in the process, the bullish picture makes more sense than ever right now.
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Additional disclosure: Short metals companies, (RGLD) (GOLD) (VALE), through put options.