Dollar Falls as Fed Fails to Act on Inflation Worries

This week, markets witnessed a significant 'No Confidence' trade, triggered by the Federal Reserve's decision to keep short-term interest rates unchanged. The announcement was met with a divided vote of 9-3, with three dissenting members preferring a 25-basis point hike.

According to the MoneyShow Chart of the Day, starting just after 2 pm on Wednesday, the US Dollar Index began falling, while the long bond and gold futures started surging. The S&P 500 index, which had initially gained ground post-Fed, eventually fell hard into the close.

The market's reaction was attributed to new Fed Chair Kevin Warsh's comments about being tough on inflation, but not taking immediate action despite renewed inflation pressures. This led investors to price in a higher risk of longer-term inflation, resulting in the sale of bonds, the dollar, and stocks, while gold prices rose.

The steepening yield curve, with long-term yields surging more than shorter-term yields, is another classic pattern seen when long-term inflation worries rise. Although this trend is still in its early stages, it bears watching, as a continued 'No Confidence' trade could lead the Fed to implement more aggressive interest rate hikes to restore order.