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Fed Chairman Powell’s speech sends the dollar lower

In his first comments since the November 2 post-decision press conference, in which he warned of a higher terminal rate, Fed Chairman Jerome Powell said today:

key statements

It makes sense to moderate the pace of interest rate rises.

The time to ease the pace of rate hikes may come as soon as the December meeting.

They have made substantial progress towards a “tight enough” policy, they have more ground to cover.
“It seems likely to me” that rates will ultimately need to rise “somewhat more” than policymakers thought in September.

They may have to keep the policy at a restrictive level “for some time.”

History advises against premature loosening of monetary policy.

We have a long way to go to restore price stability.”

We’ll stay the course until the job is done.

Inflation is still too high.

The October inflation data was a “pleasant surprise” but it will take “much more evidence” for inflation to really come down.

We estimate that the price index for the euro area economy increased by 6% in the 12 months to October; the core index of the euro area economy rose 5%.

The path to inflation is “very uncertain.”

Growth in economic activity has slowed to well below the long-term trend, and needs to continue.

It’s too early to declare goods inflation overdue, but if the trend continues, goods prices should start to put downward pressure on headline inflation in the coming months.

Housing utility inflation is expected to start to decline sometime next year if the rental trend holds.

So far, only “tentative” signs of moderation in labor demand and wage growth have been seen.

It will be necessary to moderate the growth in labor demand to restore equilibrium in the labor market.

Price stability is the responsibility of the Fed, the foundation of the economy.

As a result of the dovish comments, Fed policy rate futures imply a 75% chance of a 50 basis point hike in December, versus a 25% chance of 75 basis points.

There will be a question and answer session with more comments:

It is difficult to determine the natural rate of unemployment due to labor market shocks.

The initial increase in inflation is not related to wages, but wages are going to be important in the future.

In the service sector, in particular, wages must increase at a level consistent with 2% inflation over time.

Probably 1.5-2% above that level, adjusting for productivity.

JOLTS data today shows a continuing imbalance between the demand and supply of workers.

Demand needs to be moderated to rebalance the labor force.

For most workers, wage increases are offset by inflation.

Today’s JOLTS data has been more or less in line with expectations, and the decline in openings is positive.

It is possible that the labor market will rebalance thanks to the decrease in job offers, but it is still too early to tell.

It is difficult to determine the natural rate of unemployment due to labor market shocks.

In this situation, the Fed continues to think that the number of job openings versus the number of unemployed is important.

Elasticity of supply questions are an important set of questions the Fed is thinking about.

The Fed could “look through” supply disruptions; it is not known if that will continue.

The Fed still has a 2% inflation target that it must meet, even if supply conditions change.

Meanwhile, since the Nov. 2 news conference, markets have been in tune with other Fed officials who have been framing the bank’s message. For example, Fed Vice Chair Lael Brainard has insisted on the need for smaller rate hikes, while others, like St. Louise CEO James Bullard, have insisted on the need for even higher rates.

The FOMC’s November 2 statement seemed to hint at a turnaround, but Chairman Powell balked at that idea during his press conference.

We think he will take the same tone today, that is, the Fed may move to smaller hikes, but the final rate will likely be much higher than expected,” Brown Brothers Harriman analysts said.

The Fed’s Powell said today that “it seems likely to me” that rates should ultimately go “somewhat higher” than policymakers thought in September.”

dollar update

However, the dollar index, DXY, has fallen after the initial release of the speech from the 107 area to test below 106.70. It remains above the realized low of 106.29 on the day, but is below the 20-year high of 114.78 on September 28. The dollar is heading for its biggest monthly loss since September 2010 as investors expect the Fed to hit a rate ceiling early next year.

About the Fed Jerome Powell

Jerome H. Pow ell assumed office as a member of the Board of Governors of the Federal Reserve System on May 25, 2012, for one unexpired term. On November 2, 2017, President Donald Trump named Powell the next Chairman of the Federal Reserve. Powell took office as president on February 5, 2018.

Source: Fx Street

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