Jay Powell & # 39; s path for the Fed is fraught with complications



If there ever was a good place to take a deep breath and to get context over our unnecessarily complex world, it would be Jackson Hole, Wyoming. The landscape inspired some of Ansel Adams' biggest photography. It is therefore good for the health of central bankers, and by extension for the whole world economy, that this is the place where economists meet to give the world rights every year at the end of the summer.

Central banking always involves pressure and dilemmas. Central bankers must choose their words knowing that they will be examined in detail. That in turn means that we have to take the reaction of money markets very seriously to the speech given on Friday by Jay Powell, who is currently in his first year as chairman of the US Federal Reserve.

While his words filtered from the Grand Tetons to merchants' computer terminals, the S & P 500 rose to a new all-time intraday record. And the yield curve has been flattened again. The surplus of the 10-year interest rate on a 2-year treasury fell below 0.2 percent for the first time since 2007, before the financial crisis.

And the dollar fell against most of its competitors, while currencies of emerging countries reached 1% in less than 24 hours, according to the emerging FX index of JPMorgan. The emerging currencies have declined by 4.6 percent since the beginning of this month, largely due to the turmoil in Turkey, but this resulted in significant pressure relief.

Unlike many of his predecessors, Mr. Powell uses clear and direct language, using memorable metaphors to make his points. But just like its predecessors, it was still necessary to analyze its text in detail to find out why investors thought it was so important. You also had to understand what has become a very complicated context.

Not so long ago the Fed seemed to have a clear path for the next year or so. It would raise interest rates again, in September and again in December, raise interest rates a few times next year, and continue with so-called "quantitative tightening" – the steady restoration of previous crisis measures by slowly selling the assets it had bought and left on the balance. Now the path of the Fed is beginning to look like complications.

The messy American policy is part of it. A deposition drama, which suddenly seems much more plausible than a week ago, would increase uncertainty and make it harder for the Fed to raise interest rates. And the president himself said this week that he & # 39; not happy & # 39; was due to high interest rates because they raised the dollar and opposed its trade policy.

But the fall in EM currency & # 39; s is more important. Higher US rates are pulling funds to the US, pushing the currencies of emerging countries down and increasing the risk of EM crisis. Emerging assets have a long-term reverse relationship with the dollar (they fall when the dollar rises). A strong dollar makes it more difficult to repay dollar-denominated debts.

The movements in the yield curve, because investors remain convinced of upcoming interest rate increases while money ends up in longer-term treasury certificates, is more important. A reversed yield curve, in which short returns are higher than longer dated returns, indicates a future recession. A flat curve implies a lack of enthusiasm about the economic outlook (hence the prices do not need to rise in the future) and the fear that the Fed will soon raise interest rates and then be forced to abandon.

Furthermore, evidence of a need for higher tariffs to fight inflation is weakening. The implicit prediction of the bond market for inflation in the next 10 years rose from 1.2 percent at the beginning of 2016 to 2.2 percent earlier this year, but has since dropped to 2.1 percent, barely more than the target of 2 percent of the Fed.

Finally, US economic data start to disappoint, at least in comparison with reasonable expectations a few months ago. Citi's economic surprise indexes, which measure how data relates to forecasts, show the US in negative territory, and below the euro zone.

Faced with all this, Mr. Powell consciously said that he avoided all foreign and political questions, conceding that these were risk factors that "could demand a different policy response, but today I will step back".

But he could have given a clear signal that the Fed should tighten and did not. "We have seen no clear sign of an acceleration of more than 2 percent" in inflation, he said, and "there does not appear to be an increased risk of overheating". So no despair to make it there. His predictions for future tightening were strictly conditional. With my accents added, he said: "If the strong growth of income and jobs continues, further gradually increases [the target rate] shall probably being qualified. "

He used previous speeches to say that the impact of US monetary policy outside the US coasts was exaggerated. The change in tone is important. And the expectations for 2019 are wide open. If the Fed increases twice more this year, the market will have the chance that this will happen again with just 60 percent next year.

Clear evidence of inflation would change things again, but for the time being the Wyoming winds suggest moderate growth and low rates, where stocks can still flourish, even at high valuations after a prolonged bull market.

[email protected]


Source link

Jay Powell & # 39; s path for the Fed is fraught with complications



If there ever was a good place to take a deep breath and to get context over our unnecessarily complex world, it would be Jackson Hole, Wyoming. The landscape inspired some of Ansel Adams' biggest photography. It is therefore good for the health of central bankers, and by extension for the whole world economy, that this is the place where economists meet to give the world rights every year at the end of the summer.

Central banking always involves pressure and dilemmas. Central bankers must choose their words knowing that they will be examined in detail. That in turn means that we have to take the reaction of money markets very seriously to the speech given on Friday by Jay Powell, who is currently in his first year as chairman of the US Federal Reserve.

While his words filtered from the Grand Tetons to merchants' computer terminals, the S & P 500 rose to a new all-time intraday record. And the yield curve has been flattened again. The surplus of the 10-year interest rate on a 2-year treasury fell below 0.2 percent for the first time since 2007, before the financial crisis.

And the dollar fell against most of its competitors, while currencies of emerging countries reached 1% in less than 24 hours, according to the emerging FX index of JPMorgan. The emerging currencies have declined by 4.6 percent since the beginning of this month, largely due to the turmoil in Turkey, but this resulted in significant pressure relief.

Unlike many of his predecessors, Mr. Powell uses clear and direct language, using memorable metaphors to make his points. But just like its predecessors, it was still necessary to analyze its text in detail to find out why investors thought it was so important. You also had to understand what has become a very complicated context.

Not so long ago the Fed seemed to have a clear path for the next year or so. It would raise interest rates again, in September and again in December, raise interest rates a few times next year, and continue with so-called "quantitative tightening" – the steady restoration of previous crisis measures by slowly selling the assets it had bought and left on the balance. Now the path of the Fed is beginning to look like complications.

The messy American policy is part of it. A deposition drama, which suddenly seems much more plausible than a week ago, would increase uncertainty and make it harder for the Fed to raise interest rates. And the president himself said this week that he & # 39; not happy & # 39; was due to high interest rates because they raised the dollar and opposed its trade policy.

But the fall in EM currency & # 39; s is more important. Higher US rates are pulling funds to the US, pushing the currencies of emerging countries down and increasing the risk of EM crisis. Emerging assets have a long-term reverse relationship with the dollar (they fall when the dollar rises). A strong dollar makes it more difficult to repay dollar-denominated debts.

The movements in the yield curve, because investors remain convinced of upcoming interest rate increases while money ends up in longer-term treasury certificates, is more important. A reversed yield curve, in which short returns are higher than longer dated returns, indicates a future recession. A flat curve implies a lack of enthusiasm about the economic outlook (hence the prices do not need to rise in the future) and the fear that the Fed will soon raise interest rates and then be forced to abandon.

Furthermore, evidence of a need for higher tariffs to fight inflation is weakening. The implicit prediction of the bond market for inflation in the next 10 years rose from 1.2 percent at the beginning of 2016 to 2.2 percent earlier this year, but has since dropped to 2.1 percent, barely more than the target of 2 percent of the Fed.

Finally, US economic data start to disappoint, at least in comparison with reasonable expectations a few months ago. Citi's economic surprise indexes, which measure how data relates to forecasts, show the US in negative territory, and below the euro zone.

Faced with all this, Mr. Powell consciously said that he avoided all foreign and political questions, conceding that these were risk factors that "could demand a different policy response, but today I will step back".

But he could have given a clear signal that the Fed should tighten and did not. "We have seen no clear sign of an acceleration of more than 2 percent" in inflation, he said, and "there does not appear to be an increased risk of overheating". So no despair to make it there. His predictions for future tightening were strictly conditional. With my accents added, he said: "If the strong growth of income and jobs continues, further gradually increases [the target rate] shall probably being qualified. "

He used previous speeches to say that the impact of US monetary policy outside the US coasts was exaggerated. The change in tone is important. And the expectations for 2019 are wide open. If the Fed increases twice more this year, the market will have the chance that this will happen again with just 60 percent next year.

Clear evidence of inflation would change things again, but for the time being the Wyoming winds suggest moderate growth and low rates, where stocks can still thrive, even at high valuations after a prolonged bull market.

[email protected]


Source link

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