What Will Happen at Next Fed Meeting? Look to the Labor Market

NEW YORK (TheStreet) -- When it comes to setting policy, it's now clear that the Federal Reserve is focused on the labor market. 

Writing earlier this week, I suggested that the Federal Reserve consider the strengthening dollar in this week's meeting. The Fed didn't listen, sending the dollar lower, following the announcement that interest rates wouldn't be raised. 

As James Ramage noted in the Wall Street Journal, the Fed disappointed the market. Not only did the Fed not raise short-term interest rates at the meeting, it "again lowered both its U. S. growth forecast and its interest-rate projections...That was a cue for investors to sell the dollar."

And the turn began immediately upon the notice of the meeting's result. "After gyrating in the initial minutes following the release of the Fed statement, the dollar wavered but then took a downward turn for the duration of Ms. Yellen's news conference," he wrote.

Another market noticed the policy stance coming out of the meeting. Almost immediately, the stock market began to rise, and rise pretty dramatically. And, the strong rise continued into and throughout Thursday.

As it has been since the Great Recession, the Federal Reserve continues to focus more on the labor market, something it really cannot control, and continue to ignore what is happening to the value of the dollar, something over which it has obvious sway.

It should be noted that the Federal Reserve did not intentionally do anything to encourage a strong U.S. dollar. It just happened to be at a different stage of the policy cycle that most every other central bank in the world. This is especially true in the case of the European Central Bank and the Bank of Japan, which are both in various stages of their own quantitative easing programs.

The immediate response of the two markets on Wednesday, the stock market and the foreign exchange market, tells us a lot about the fundamental outlook about future Federal Reserve, and federal government, policy making.

United States policy makers are going to focus on the condition of the labor markets, because that is the most politically sensitive area of the economy. And, even though these policy makers may not be able to do a lot about improving the labor situation, they do not dare produce a policy that looks as if it might harm labor market conditions. Thus, the philosophical foundation for credit inflation continues to stay in place.

What does this mean for the markets?

The mantra in the stock market over the past six years has been "don't fight the Fed." Hence, the stock market rose.

The mantra in the foreign exchange market is also, "don't fight the Fed." This application is based on the premise that, over time, the Federal Reserve, and the United States government, basically support a weak dollar; and that has been largely true.

Perhaps some day the Federal Reserve will finally learn a lesson that former Fed Chairman Paul Volcker once voiced, "the single most important price in its economy" is the nation's exchange rate. It just seems as if no one at the Fed, except Volcker, really believed this.

 

 

  This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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