How Much Did Powell’s Speech Move the Needle?
Fed Chair Jerome Powell did what he was widely expected to do last Friday: Announce that “the time has come” for the Fed to pivot towards easing. As in the past, the meeting at Jackson Hole proved to be the springboard for a change in policy that would take effect in the upcoming meeting of September.
However, markets were already pricing in so much easing that the reaction to Powell’s Speech was somewhat muted. The dollar did get weaker and risk appetite stepped up in the final hours of trading on Friday. But the events over the weekend drained a lot of the enthusiasm. The tit-for-tat bombings across the Israel and Lebanese border sent traders running for safe havens, including the dollar. Though both sides insist that the attacks are “done” and do not wish to escalate, markets could be a little on edge for the next couple of days.
Measuring the Impact
While the market largely cheered Powell’s Speech, the major gauge of impact didn’t move all that much. That is, how much easing investors expect to happen in the coming months. The general thrust is pretty much the same: Four rate cuts (a total of 100bps) by the end of the year.
Even the timing didn’t change all that much, with the chance of a double rate cut in September rising from a quarter to a third. Still, a majority of two thirds thinks that September’s rate cut will be 25bps, and that the October one will be 50bps.
The Broader Impact
With the last of the big central banks taking on an easing bias, markets around the globe appeared to take a view that monetary policy will be easing. Even as far away as Australia, where the RBA insists it’s still on a potentially hiking track, markets are pricing in a slowly falling rate scenario for the rest of the year.
Commodities also took heart from the news, as easing in the world’s largest economy diminishes the risk of a recession and could cause demand to rise. Gold prices are highly dependent on interest rates, and further easing from the Fed could keep supporting the yellow metal.
What Happens Now?
Powell did not go so far as to specify how much rates would drop. Or, indeed, to explicitly say that September was the starting point. The central bank remains data dependent, and so the expected delivery of easing is likely to rely on what happens with PCE later this week. Powell also said that the labor market had reached a condition where the Fed isn’t so worried about it, which means the impact from August NFP could be somewhat less than last time around.
But, now that the dollar is inclined towards easing, it poses a target for carry trades against other, more risky currencies that offer higher rates. The development of this phenomenon, particularly as the Fed actually starts easing, could accelerate weakness in the dollar compared to emerging market currencies.
