It’s gearing up for a decisive few days for the dollar and major currencies as Fed Chair Jerome Powell delivers remarks at the Jackson Hole symposium on Friday at 1400 GMT.
This year’s theme, ‘Challenges for Monetary Policy’, is a suitably fitting one, ten years after the financial crisis. Trade conflict, slowing global growth and plummeting bond yields are all fuelling fears of a recession with a state of gloominess over the world economy.
However, the symposium does offer a chance for the Fed to send policy signals and explain current thinking, especially after Chair Powell’s ‘mid-cycle’ interest rate cut at the last FOMC meeting. Indeed, it wouldn’t be the first time it has made markets move – see 2010’s pow-wow – when Chair Bernanke used his opening remarks to signal QE2, a fresh round of stimulus.
This time around, with markets currently pricing in around 65 basis points of cuts this year and for Fed funds to be cut to 1% by the end of next year, how does the Fed view this ‘mid-cycle’ compared to the two previous ones in the 1990s. Does Powell stick to his insurance cut mantra and repeat that this is not the start of prolonged easing cycle, or has his script now changed owing to mounting global risks?
Of course, President Trump upset the landscape twenty-four hours after the July rate cut by ratcheting up the trade war once more when he announced additional tariffs on all Chinese imports. The unpredictability of the trade war coupled with inflation below the Fed’s 2% target and unemployment at 50-year lows leaves Fed officials in a tricky spot with markets eager to see that the Fed isn’t falling further ‘behind the curve’.
Powell, like many of his predecessors, will have to carefully manage expectations and we think this is likely to entail changing the Fed’s narrative to one which keeps the central bank’s options wide open and to future rate cuts. We think those in the market who believe he will be more aggressive and pivot to a ‘whatever it takes’ mode may well be left underwhelmed.
Interestingly, we had the release of the FOMC Minutes from the July meeting last night. Although technically ‘old news’, these showed that most participants joined Powell’s (hawkish) view of an insurance rate cut, with dissension from doves wanting a larger rate cut and hawks opposed to any move.
With the help of continued trade tensions and overseas risks, this suggests another 25bp cut or even two, but is still some way off the current market pricing of another 100-125bp. With most of the major currency pairs consolidating their recent moves and trading in relatively narrow ranges this week, the dollar is set to stay bid unless a more accommodative bias is delivered.
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