Powell speech: Policy has not been as accommodative as we thought

12 Juillet, 2019, 12:39 | Auteur: Auguste Feret
  • Powell speech: Policy has not been as accommodative as we thought

Powell indicated during his prepared remarks before Congress Wednesday that a rate cut is impending due to worldwide economic turmoil. "Inflation pressures remain muted".

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"Chairman Powell, thank you for your service, thank you for your work to keep the Federal Reserve independent of both parties and do your job for what it was set up to be", he said.

The dollar index.DXY against a basket of six major currencies stood little changed at 97.081 after retracing much of its losses on Thursday, when it had briefly stooped to a six-day low of 96.795.

Some surveys have suggested the manufacturing sector is creaking under stress from the trade war with China, with US firms contending not only with the cost of President Trump's import tariffs but also a deterioration of the global economy that is threatening domestic and worldwide demand. The yield on the 10-year Treasury note fell slightly 2.046%, and the yield on the 2-year slipped to 2.205%. Meanwhile, interest rate futures appeared to price in greater odds of an aggressive rate cut of half a percentage point in July. We can measure whether a rate cut is being priced-in by examining the difference in borrowing costs for commercial banks over a specific time horizon in the future.

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Several policymakers thought rates should be lowered to "cushion the effects" of adverse shocks from events such as U.S. disputes with trading partners and to firm up inflation that is failing to meet the United States central bank's 2 per cent annual target, the minutes showed.

"The Fed has never disappointed a market with such strong expectations of action", Joseph Lavorgna, chief economist for the Americas at Natixis, wrote in a recent analysis. The market also began to price a 58% chance of a 50-basis point cut.

He said the Fed has established a working group to follow the project and is coordinating with other central banks across the globe. May's 2.3% year-over-year increase in PPI, excluding food and energy prices, had been the slowest rate since January 2018.

Though US economic growth remains largely on track, and the jobs report for June showed continued strong hiring, the events of May changed US trade policy from something of a sideshow in the Fed's view to a central concern. "The uncertainties around global growth and trade continue to weigh on the outlook".

This means a July rate cut is nearly certain, by at least 25 basis points, maybe even more, but even James Bullard, the noted dove and St. Louis Federal Reserve President in a speech at the same time as Powell's stated that 50 basis points would be "overdone" and that a 2nd cut later in the year should be enough.

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