Fed walking well-worn track, dollar most at risk?

The latest round of Fed-speak and projections have again pointed to downgrades for the outlook for growth and inflation. While the key word "patient" was removed from the statement in regards to maintaining the current stance of policy, it's not clear why policy rates would be rising in the foreseeable future with downgrades to key forecasts.

This is not a new phenomenon, with the Fed consistently overestimating growth for the last couple of years.

The unemployment rate has been much lower than forecast and these downgrades to growth weren't a barrier to the tapering of QE3. A hike in policy rates, however, is a different proposition and it will be a difficult sell if the Fed continue to downgrade economic growth. With recent employment and ISM data tending to be weak, there isn't a clear catalyst in the short term to turn this downgrade cycle around

It's also quite marked how far expectations for the Fed Funds rate by end 2015 has been downgraded in the last 3 months. The chart on the left shows these expectations, with the size of the bubble representing the number of Fed members providing projections at a given level of the Fed Funds rate for the end of this year.

Over 2014, expectations tended to drift higher, with most members suggesting rates would lift to over 1% by the end of this year.  The rapid drop inflation, oil prices, slower leading indicators and a higher dollar have seen those expectations shift quite a bit, with the only 4 members of the FOMC now seeing rates above 1%.

While bonds have responded to a more dovish Fed with yields very low, perhaps the bigger implications are for the US dollar.

The dollar has dipped ~3% from its highs following the latest Fed announcement (on a Trade Weighted basis), although is still very strong.

The biggest driver of this gain has been the narrative of a divergence in policy between the Fed and other major central banks.  But the path for the Fed Funds rate is perhaps not as clear as previously perceived.

Indeed, the economic data is perhaps not as divergent either. Leading indicators for Europe are now tending to be better than elsewhere, even if they are coming off a lower base.

This will perhaps put some doubt in the story that has driven the rampaging US$. And this could be particularly important for commodities that have been crushed in the first quarter of this year. While fundamentals in China may not be shifting too much, a halt in the rise in the US$ would help support those commodities which have seen supply cuts in the face of weak demand.