This week’s US Economic Events schedule is comparatively light, after last week’s rush of rate decisions. Markets will have the time to digest the latest moves by central banks. However, several US economic events could shake up the markets and impact dollar pairs.
Investors are likely to be keenly focused on Fed Chair Jerome Powell’s comments on Thursday, as he addresses the Treasury Market Conference. That’s because Powell has developed a habit of using his first public speech after a major policy decision like the last meeting to provide more context in light of the market reaction.
What’s At Stake
The stop-and-start move by equities after the Fed’s “jumbo” rate decision suggests markets are looking for some guidance about what to expect from upcoming US economic events.. The day of the cut, the markets actually fell, only to score a new record high the day after. Markets then turned negative. This has left the dollar trading relatively sideways, as investors wonder if interest rates will fall as much as they hope.
The main issue is whether the Fed is moving because the economy is faltering, or because inflation is coming down. Evidently, there is a combination of both, but how much weighting has will determine the market reaction. Investors are hoping for a “soft” landing, where the economy continues to grow while inflation does not, which has been achieved in the past. That’s why optimistic traders are comparing to 1995, when the Fed managed an initially aggressive rate cut, to be followed by the dot-com boom. Pessimistic traders are comparing to the most recent organic recession: The Subprime Crisis.
Down, But For How Long
The optimistic scenario implies that the Fed will slow its rate cut trajectory relatively quickly. If the economy rebounds, for example, next year, the increased economic activity would have inflationary pressures. That means the dollar would likely remain fairly strong, particularly in the context of other economies piling on the easing, like China and Europe.
On the other hand, if the US economy deteriorates, then the Fed would likely keep cutting. Slower growth not only means less inflationary pressure, but the reverse could happen with deflation becoming a problem. A slow economy would likely see higher unemployment, triggering the Fed’s second mandate to ease as well.
The Pivotal Moments
That’s why investors are likely to be looking very closely at Powell’s comments to see if he emphasizes jobs (economy is a problem) or inflation (economy isn’t a problem). Speakers so far have said that inflation was the driver of the rate cut, as they expect the PCE price index rate of change to fall substantially.
That brings up the second important event of the week, which is Friday’s release of the Fed’s preferred measure of inflation. Analysts believe that Core PCE will be unchanged at 2.6%, which contradicts expectations from Fed officials that it will fall. Easing of inflation could help reassure markets that the Fed is on the right track about cutting, and weaken the dollar.
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