It’s all about the new Fed Chair today as Jerome Powell will give his semi annual Congress testimony later this afternoon. And of course, there will be a small question mark over just what his plan is when he appears later. Does he remain pragmatic and toe the party line when it comes to policy, the balance sheet and the inflation outlook. Or, just maybe does he set to build his reputation and go in all guns blazing. There are arguments for both approaches but the safe money is on the former.
So what will Jerome Powell say? For me he will take the last FOMC meeting minutes and almost repeat it word for word, with the expectation of inflation hitting 2% but not overshooting, and say that gradual rate hikes are still necessary, stopping short of hinting that we may well see more than three hikes in 2018.
There have been rumours that Jerome Powell may use his first platform as Fed Chair to push a more hawkish rhetoric, however there is no doubt that markets are still a little jittery, with huge swings on the US dollar and equity markets still not wholly recovered from February’s moves. It became evident with Janet Yellen that the Fed cares just as much about financial market stability as it does about the other areas in its remit, so Powell won’t want to trigger financial market overreaction with an over hawkish performance.
However, the temptation to be different from his predecessor will be strong, and by adopting a more hawkish stance now it could well make the effect on the markets a little more manageable if the Fed were to adopt a more aggressive policy before the end of the year. The best time to show you mean business in a new job is of course right from the get go.
I expect Powell to keep to the script today, which may not rule out volatility, in the dollar especially, but it should mean that we don’t see much of a material change in rates once the dust has settled. It should be a similar story for equity markets as well, but such is the nervous feeling around global markets at the moment, the fear that the dollar could collapse if the Fed Chair isn’t hawkish enough is a real one so we must be cautious.
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies