Frozen Fed monetary policy - Losing a degree of freedom in foreign exchange markets

The US monetary policy choices are frozen. The downturn in the US has caused an aggressive lowering of short rates by the Fed but now higher inflation in US is a growing problem, so there are limited policy choices for the Fed given its dual role of control growth and inflation. Lower current yields to help the recession and you will create the opportunity for higher inflation given the expansion of credit. If you raise interest rates to stop inflation, you will create poorer credit conditions and stifle future growth. The Fed is stuck between two hard choices in the current environment and will have to wait for new information to direct their choices. Until the Fed is driven or forced to make a choice, 2% Fed funds rates will continue.

A limited set of choices for the Fed means that the dollar will be driven more by foreign central bank behavior. Money will flow based on the choices made by other central banks and not by anything that the Fed can do. For example, there will be more focus on ECB behavior where there is the potential for more policy changes. Of course, no action is an action, but the current Fed freeze will place more weight on following the behavior of central banks in other countries and not on the action in the US. The need to focus outside the US for dollar direction will increase.