Dollar drops sharply as Fed chair Jerome Powell delivers his speech at the Jackson Hole Symposium. The markets seem to be responding to Powell’s comment that “we have seen no clear sign of an acceleration above 2 percent” and “there does not seem to be an elevated risk of overheating”. However, we believe that his messages need to be listened to more carefully.
In particular, Powell pointed to two common questions outside the Fed at the beginning part of the speech: They are
- With the unemployment rate well below estimates of its longer-term normal level, why isn’t the FOMC tightening monetary policy more sharply to head off overheating and inflation?
- With no clear sign of an inflation problem, why is the FOMC tightening policy at all, at the risk of choking off job growth and continued expansion?
After presenting all the theories and case studies, Powell concluded that no acceleration in inflation above 2% is “good news”. And such good news “results in part from the ongoing normalization process”. And he added that ” if the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate.”
He reiterated that “we are setting policy to do what monetary policy can do to support continued growth, a strong labor market, and inflation near 2 percent.” And he didn’t even mention yield curve as a condition like Bullard and Bostic.
To us, Powell’s message is clear. The Fed is doing a great job with monetary policy normalization. The US economy is at this very good state partly because of the work of the Fed. And if job growth, income growth continue, Fed will continue with the rate hikes. It doesn’t matter if the the POTUS is “thrilled” or not. For those with intellectual ability, read the theories and case studies. For those without, just enjoy the economy and shut up.
So, Powell is indeed reaffirming Fed’s path and that shouldn’t be dollar negative at all.