The dollar rallied today on slightly higher interest rates, and hopes that the Fed will be able to raise short term rates more quickly than expected next year. The August Fed Funds futures ticked up a bit, raising the probability to 40% of a raise in the second half of 2010.
It is going to be interesting to see how Ben achieves this change in policy beyond the jawboning. Raising the interest paid on Excess Reserves is one way to do it, without actually draining funds directly from the real economy.
There is sort of a cocky smugness at the Fed that they believe they have inflation all figured out, given the Volcker experience. Just keep raising rates until you break it, and run a bluff on expectations as you go. We'll see how easy it is when the time comes.
As for the dollar, this appears to be a technical reversal of the low end of the downtrending channel, at least for now. Bucky has its work cut out for it. Without structural reform, the economy cannot build a recovery on low paying temporary jobs.
Timmy and Obama were on the airwaves today, touting programs to create jobs for next year. This will take money, and a resolve in the Congress that we do not yet see. Programs must be accompanied by reforms, or this is just The Credit Bubble, Part Trois.
