What did the Fed keep silent about?
Fed Chairman Jerome Powell promised next year to hold a press conference after each meeting of the regulator. But this year, as in all the previous ones, the chairman of the Fed will talk with journalists only four times. As a rule, decisions to raise or lower rates were made at those meetings after which the head of the regulator could fully explain the position to the financial world. Traders are accustomed to this pattern, so they did not have special illusions for yesterday’s meeting.
Nevertheless, the August meeting was not “pass-through”. At stake is the fourth increase in the interest rate this year. In addition, the market had to make sure that the regulator was ready to raise the rate in September, although traders are confident in this step more than 90%. In general, the Fed justified investors’ expectations, however, without saying anything new. The main “hawkish” feature of the accompanying statement is that the Fed simply kept silent about the possible risks. But this was enough to ensure that the US dollar kept the status quo in the market, and paired with the euro even strengthened to the middle of the 16th figure.
But let’s start with what theses the US regulator did after all. First of all, it should be noted that the Fed changed its formulations somewhat, tightening the general tone of the statement. For example, according to the Fed, annual inflation does not “approach two percent,” but “remains near this mark”; unemployment does not “decline”, but “remains at a low level”; Consumer spending does not “show signs of growth,” but “increases at a strong pace”; The US economy does not grow at a “decent pace”, but “strong enough.” Such a seemingly insignificant rehash in the translation into “human” language means that the regulator is satisfied with the current trends in the above areas.
Also, the Fed repeated that the rates will continue to increase gradually, while the monetary policy remains stimulating (and not restraining). Traders reacted to yesterday’s meeting accordingly, the probability of raising the rate to 2.25% at the September meeting rose to 92%, while the chances of raising the rate to 2.5% at the December meeting are estimated at 65%. Last week, the market was not so confident in the actions of the regulator (the probability was 80% and 45% respectively).
What did the Fed keep silent about, thus inspiring dollar bulls? First of all, Federal Reserve officials did not comment on and generally mention the risks associated with foreign trade, and, more simply, the trade war with China. Although Jerome Powell previously focused on this aspect of his attention, saying that high trade duties will harm the US economy. However, the regulator chose to ignore the trade conflict, although it continues to gain momentum.
Literally yesterday, Washington announced that it was preparing to introduce a 25% duty on Chinese goods for a total of $ 200 billion. Beijing, in turn, has already introduced additional duties on American products, the new tariff policy affected about forty percent of US exports to China. In addition, China continues to devalue the yuan. Today, the USD / CNY rate is 6,828, the highest since May last year. But the Fed in this case decided to resort to the “policy of the Ostrich”, as if not noticing such a large-scale process of the trade war.
Nor did the Fed mention the risks of inverting the yield curve. The difference between the yield of 10-year-olds and 2-year-old Treasuries continues to decline and at the moment is practically at the 10-year minimum. This situation looks like an alarm signal, as it may serve as a sign of an approaching economic recession. However, this moment was also tactfully omitted from the Fed’s attention.
In addition, the accompanying statement does not indicate whether members of the regulator discussed the issue of a neutral rate, in other words, when the process of tightening monetary policy will be paused. Jerome Powell, speaking not so long ago in Congress, said that the Fed is still discussing when the so-called “neutral rate” will be achieved. Naturally, the accompanying statement does not reflect the course of the meeting (unlike the protocol that will be published later), but some analysts had expected that in the text of the statement there would be a reservation “for now” – “so far, plans to raise the interest rate remain.” Such a formulation would say that the Fed as a whole is ready to take a break in tightening monetary policy, even without a notation of the level of a neutral rate and time guidelines. However, the regulator also ignored this aspect.
In general, the Fed retained its main positions, somewhat toughened the tone of its rhetoric. This approach has provided little support to the dollar, but strengthened the won positions. However, even today, the focus of attention of traders will be shifted to the Friday release of key data on the US labor market.