Overnight, Federal Reserve Chairman Powell was dovish stressing the Fed would remain patient to enable a full US recovery: ‘we at the Fed will do everything we can to support the economy for as long as it takes to complete the recovery.’
Powell also said interest rates would not be lifted prematurely: ‘we will not raise interest rates pre-emptively because we think employment is too high [or] because we fear the possible onset of inflation.’
The Fed Chair argued that inflation would still only be temporary: ‘inflation has increased notably in recent months. This reflects, in part, the very low readings from early in the pandemic falling out of the calculation; the pass-through of past increases in oil prices to consumer energy prices; the rebound in spending as the economy continues to reopen; and the exacerbating factor of supply bottlenecks, which have limited how quickly production in some sectors can respond in the near term. As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal.’ And Powell warned ‘we have a long way to go’ to meet the Fed’s goal of maximum employment. As the chart shows, the US economy has still to recover 7.6 million jobs lost during the pandemic.
Similarly, earlier this week, New York Fed President Williams claimed the US economy had not made ‘substantial further progress’ to justify the Fed shifting from its current dovish stance.
Source: Bank of Singapore, Bloomberg
In contrast to more hawkish regional Fed presidents including St. Louis’ Bullard and Dallas’s Kaplan, the Fed’s senior leaders thus remain reluctant to start tightening monetary policy yet.
The Fed’s senior leadership - which includes Powell, Williams, Vice Chair Clarida and Fed Governor Brainard - matter more as each official gets to vote at every meeting of the Federal Open Market Committee (FOMC). In contrast, regional Fed Presidents only vote in one out of every three years so have markedly less influence on setting monetary policy.
We expect the Fed’s leaders will keep monetary policy dovish to the benefit of risk assets this year and prevent a broad rebound in the USD. We only see the Fed starting to taper its bond buying early next year. Thus, we continue to favour higher yielding currencies like the CNY and currencies likely to be boosted by central banks hiking rates in 2022 including the GBP and CAD.
But the hawkish tweaks made at last week’s Fed meeting to its overall dovish outlook - officials started discussing when to taper quantitative easing and the FOMC’s new median forecasts now show two interest rate rises may occur in 2023 from no hikes before - have increased expectations that the Fed will start to exit its ultra-loose stance sooner rather than later. Last week’s changes are thus likely to increase volatility in risk assets for the rest of 2021 even if the central bank doesn’t begin tapering until early 2022.Disclaimer applicable to recommendation
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