Forexlive Americas FX August 25 News Digest: Powell/Fed Set to Raise Rates, But ‘Carefully’

The Fed’s Jackson Hole speech finally arrived and unlike last year when the speech was short and sweet and to the point, there was a bit of something for everyone:

Regarding monetary policy and rate decisions:

• Willing to raise rates further if deemed necessary.
• The next step will be data driven.
• The Federal Reserve will act “cautiously” when deciding whether to raise rates again or hold them.
• Uncertainty reigns in the economy, which requires an “agile” monetary policy.

On economic observations:

• Inflation remains higher than desired.
• Two months of positive data is just the start; more is needed to gain confidence in the path of inflation.
• The current policy is restrictive, but the neutral level of rates is uncertain.
• The Federal Reserve remains committed to an inflation target of 2%.
• Lower inflation could also necessitate a slowdown in the labor market.
• Signs that the labor market is not cooling could lead to more action by the Federal Reserve.
• There is evidence that inflation is increasingly sensitive to labor market conditions.

Unique economic dynamic:

• Supply and demand disruptions during this cycle have unique effects on inflation and labor market dynamics.
• Job vacancies have fallen without a corresponding increase in unemployment, indicating a strong demand for labour.
• Inflation appears to be more sensitive to labor market conditions than in recent decades.

Conclusion and perspectives :

• The Federal Reserve faces uncertain economic conditions.
• Risk management is crucial given the current uncertainties.
• Decisions at future meetings will be based on a comprehensive assessment of data, perspectives and risks.
• The main objective is to restore price stability, which is essential to achieve the twin objectives of a strong labor market and stable prices.
• The Federal Reserve is committed to continuing its efforts until the goals are achieved.

Other Fed members who spoke today include Fed Harker:

• Rate cuts are unlikely before next year.
• reiterated his sentiment that he sees no need for further rate hikes now

The Fed’s Goolsbee also spoke today and is typically a dove, but his comments were a bit more cautious:

• Still confident of reaching the golden path of a soft landing
• He thinks there is still a long way to go when it comes to inflation
• Inflation of 3% was lower, but largely due to energy, which may also pick up.
• We haven’t seen consumer spending deteriorate as we usually see given rising yields.
• He is patient to reach a goal of 2%

Market reaction:

The market’s first reaction was a slight decline in the dollar, perhaps due to the “cautious” comment, which could be seen as dovish. The dollar then reversed higher, only to pull back from its high levels, but still closed higher.

For a rise in September, the odds remain around 20%, but for a rise in November, the odds go back above the 50% level.