The FOMC statement confirms we are at the cusp of an easing cycle, the Fed is worried about disinflation, and as a result, we can conclude the Fed will take steps to boost inflation. An easy Central Bank policy is dollar negative. Yesterday, the dollar moved lower across G-10 FX (See Figure 1). The dollar is also weaker against Emerging Markets (EM) FX (Figure 2). This is a positive environment looking forward for risk, stocks, and particularly foreign stocks.
Especially important, the Fed continues to emphasize market-based measures of inflation (TIPS) and in the statement notes that market-based measures of inflation have declined. The Fed is watching TIPS, and will likely not cease easing until TIPS break-evens move meaningfully higher. Yesterday, TIPS break-evens were beginning to move higher again (Figure 3). This is a very positive environment for TIPS and other inflation proxies like Gold. Gold has been moving higher in price since the announcement.
Figure 1: G-10 Currencies Spot Returns
Source: Bloomberg, accessed 6/19/2019
Figure 2: Emerging Markets Currencies Spot Returns
Source: Bloomberg, accessed 6/19/2019
Figure 3: 10 Year TIPS Breakevens
Source: Bloomberg, accessed 6/19/2019
Figure 4: Gold
Source: Bloomberg, accessed 6/19/2019
Jonathan E. Lewis
Chief Investment Officer