The President keeps on complaining
That higher Fed rates are constraining
The tempo of growth
But Powell is loath
To change things til prices are waning
Over the weekend, the President registered his dismay over recent Fed policy moves, apparently calling out Chairman Powell for raising rates too swiftly. His complaints centered on the fact that the Fed’s gradual removal of policy accommodation is helping to support the dollar and has been responsible for its recent strength. Recall that since the middle of April the dollar had rallied more than 8% before its recent modest pullback. So even with a 2% decline in the past week, the dollar remains far stronger than earlier this year. And that is what has the President upset. He sees the dollar’s strength through the lens of his trade policy and it is effectively undermining the tariff process.
Now, this is not the first time that the President has complained about the strong dollar (that occurred shortly after his election in 2016), but for some reason, the market has become far more concerned this time that it may impact the Fed’s actions. Perhaps adding to that sentiment was a speech yesterday by Atlanta Fed President, Rafael Bostic, where he explicitly stated that he would not knowingly vote for rate hike that would invert the yield curve. He is now the fourth Fed President to discuss that issue, although he is the only member of that group with voting privileges this year. The point is that there has been an increase in the discussion of whether the Fed will continue on its current rate hiking path which still seems slated for a hike in both September and December of this year and three more next year. Interestingly, though the dollar responded to the discussion, Fed funds futures remain unmoved and are still pricing in the same probabilities as last week, 90% for September and 60% for December.
So the question has become, will Powell ignore the President and act as he sees fit, or will he bow to political pressure? My money, at this point, remains on Powell. There has been no indication, as yet, that the US economy is doing anything but expanding at a solid clip. And more importantly, when looking at the Fed’s dual mandate, the current issue is clearly on the stable prices side rather than the unemployment side. While the Fed has decreed PCE is the key policy data point, there can be no mistake that Powell, an experienced pragmatist, is abundantly aware that CPI is running at its hottest level in more than a decade. The point is that inflation pressures continue to build and the Fed is not likely to ignore that situation. In fact, that is why Powell’s speech on Friday in Jackson Hole is arguably the most important news for the week. Everyone is waiting to hear if he has changed his tone, let alone his tune, about the economy and the proper Fed policy going forward.
Until then, though we will have to make do with tomorrow’s FOMC Minutes, where analysts will be looking for how much the trade story impacted their deliberations, and housing data tomorrow and Thursday.
Turning to the overnight session, the dollar has continued yesterday’s weakness and is lower by a further 0.35% this morning. The movement has been fairly uniform through the G10, with all of those currencies rallying between 0.2%-0.5%. And this has been a dollar story as there has been virtually no data of note from any one of those nations. In truth, the only G10 news of any sort came from Australia, where the Minutes from the last RBA meeting highlighted that increasing trade tensions could have a negative impact on the economy and currency, and that interest rates Down Under were unlikely to move at all during the next year.
Turning to the EMG bloc, we also see generic dollar weakness with just a few outliers. The Turkish lira continues to suffer, falling just under 1% this morning despite the dollar’s overall weakness, and we saw the Korean won slide 0.5% as well. But the rule has been a softer dollar today.
Given there is no US data to be released this morning, and there are no scheduled Fed speakers, it seems that the day is likely to follow the overnight pattern of mild further dollar weakness. Of course, given the apparent catalyst for this move, and the President’s penchant for doubling down, it would not be surprising to hear more from him if he felt it could push the dollar lower. However, history has shown that political wishes are just that, and the market will respond to policy changes, not talk. So even though further commentary by President Trump could lead to modest extra dollar weakness, as long as Chairman Powell maintains his current stance, this dollar move should be faded. Hedgers, take advantage of the opportunity to add to hedges at current levels, as my sense is that nothing at the Mariner Eccles building has changed. Higher US rates are on the way.