At the end of last week, market attention was focused on new Fed chairman Powell’s speech at Jackson Hole. The speech was predominantly centered on the uncertainty around real-time estimates of the neutral rate of interest, the non-accelerating inflationary rate of unemployment (NAIRU) and the rate of potential growth. Given the increased discussion around the level of neutral interest rates and with regional Fed presidents presenting their own estimates, the Fed chairman’s speech reaffirmed the message that the committee will retain its data dependent stance. As rates approach neutral, the Fed’s reaction function is likely to change with the bank becoming more sensitive to data.
Powell Discussed Historical Examples
In terms of the dangers of focusing too much on real-time estimates, Powell cited two historical examples during the Great Inflation period seen during the late 1960s – 1980s. Powell highlighted estimates of NAIRU which he deemed too optimistic as being a key reason why the Fed kept policy so loose, causing the runaway inflation seen.
On the other hand, Powell also praised Fed chair Greenspan for “avoiding the great inflation era mistake of overemphasizing imprecise estimates of the stars” and trusting his intuition regarding a productivity boom instead of real-time estimates of NAIRU and potential growth. In this instance, Greenspan assesses data meeting to meeting before tightening monetary policy.
Powell Praises Greenspan
In discussing both examples, Powell’s key message was to be cautious in relying on estimates of these “stars” as “the stars are sometimes far from where we perceive them to be”. However, Powell did also note that Greenspan’s approach of waiting on signs of inflation might no longer useful given the flat Philips curve presently which suggests the lack of relationship between resource pressures and inflation.
Powell concluded his speech by saying that modern risk management favors “looking beyond inflation for signs of excesses” with the “risks from misperceiving the stars also now playing a prominent role in the FOMC’s deliberations”. Finally, Powell cited the recommendation of Fed’s Brainard who said that “when you are uncertain about the effects of your action, you should move conservatively”.
Powell Highlights Fed’s Caution
Essentially, the takeaway message from Powell’s speech is one of caution. Powell is reaffirming the Fed’s commitment to remaining cautious as it pursues its strategy of gradual policy tightening on a data dependent basis. The Fed’s reaction to data is expected to become increasingly sensitive as rates approach neutral whereby weaker data could prompt the Fed to reduce the pace of its policy tightening further and stronger data could see the Fed hiking at a faster pace than currently projected.
Fed On Course to Raise Rates Further
The comments come on the back of the release of the latest FOMC meeting minutes which revealed a strongly hawkish tone though did see the Fed highlighting some concerns. The minutes showed that committee members generally noted there was a considerable momentum in household and business spending alongside highlighting that it would be likely necessary for the “not-too-distant” future to no longer refer to monetary policy as accommodative.
However, the minutes also showed committee members noting that an escalation in trade disputes was a potentially consequential downside risk to the US economy and that these ongoing disputes provided a high level of uncertainty and risk. Further discussing the ongoing trade disputes, members said that prolonged trade disagreements were likely to weigh on business sentiment, investment, and employment.
The rally above the 95.10 region has failed and the price is now turning lower again. If price remains below this level, the focus will be on a run down to test deeper support at the 91.00 level. If price moves back above the 95.10 region, focus will turn to a run up to the next resistance at the 97.66 level while above there we have the 100.67 level resistance along with the completion of the ABCD symmetry swing and the resistance trend line of the bearish channel.