Fed policy under the spotlight again as Fed chair Powell addresses Jackson Hole.

Friday, 23rd August 2019 09:51 - by Shant

One gets the sense that the financial markets are still banking on the 'Fed put' in current times - the notion that the central bank will come in to support any weakness through policy - with the White House administration crying out for help from the Federal Reserve and getting the bare minimum in terms of stimulus required.  It has now become a weekly exercise in criticising the chairman of the central bank, who as yet, remains independently committed to steering policy towards maintaining economic stability rather than bowing to external pressures, both geographically and institutionally.  Given policy decisions are made by consensus, it does seem that Jerome Powell is being unfairly treated at the present time.  This was highlighted by a trickle of comments from fellow members who joined the symposium at Jackson Hole yesterday.

Esther George was unequivocal in her view that interest rates should have remained unchanged, with her dissent duly acknowledged at the time along with her colleague Eric Rosengren.  George further extended her reluctance to offer more policy accommodation and this was somewhat backed up by some of her other colleagues, including the Philadelphia Fed's Harker who is in favour of keeping policy 'here' to see how things 'play out'.  Dallas Fed's Kaplan was also erring on the side of a neutral stance in the near term, saying he would like to avoid taking any further action as yet.  The combination of the above rhetoric was enough to lower the odds for a stronger rate cut in September, where the probability is now firmly in favour of a 25bp cut at best - something which based in sentiment and expectation would be deemed as a disappointment to the markets.  

So as we can see, the Fed chair is caught between a rock and a hard place, and given his propensity to avoid unsettling the markets, we can expect another potentially mixed message, given that the 'dovish bar' is set high enough.  On the other hand, he has clear dissent from within the ranks.  Unemployment levels are at multi-year highs and as we can see from the weekly jobless claims data, there is little evidence of weakness in the labour market at the present time.  Add to that the healthy levels of consumption - which represents a large part of growth in the US - and the argument for aggressive rate cuts lose substance.  Against this, however, we are starting to see some weakness creeping into the domestic PMIs, falling closer in line with global metrics where Europe's malaise has been clearly acknowledged and widely documented.  These dynamics, therefore, feed into the view that the Federal Reserve perhaps need to think in global terms, not least to facilitate a global recovery (not that that is their mandate), but rather to contain any contagion effects on the US.

On this basis, Jerome Powell could have a possible route in trying to allay market fears, and at the same time appease the White House and their concerns that FOMC policy continues to strengthen the Dollar.  Whether the Fed acknowledges that exchange rates will or can be factored into policy decisions at any time in the future remains to be seen - unquantifiable at this stage - but it is certainly pertinent to the central theme of global trade.  President Trump is clearly hoping that the Fed will 'accommodate' given the broader external risks, and it seems the equity markets are doing likewise.  Over to you Mr Powell.

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.