Powell Speech Preview: Will the Fed Chair Signal Further Policy Easing?
Federal Reserve Chairman Jerome Powell will deliver a speech on the Economic Outlook and Monetary Policy at the National Associations for Business Economics (NABE) Annual Meeting in Philadelphia on Tuesday. With the US government shutdown delaying important data releases, Powell's comments could impact the US Dollar (USD) valuation in the near term.
While recent comments from Fed officials have been mixed, the CME FedWatch Tool shows that the market is now fully pricing in a 25 basis point (bps) interest rate cut in October and sees a nearly 90% probability of another 25 bps cut in December.
Fed Governor Michael Barr said he is skeptical the Fed can ignore rate-driven inflation and stated that the inflation target faces significant risks. He added that several factors could mitigate those risks. Similarly, St. Louis Fed President Alberto Musalem argued that it would be difficult for the Fed to respond to near-term labor market fluctuations if inflation expectations become unmanageable.
Taking a more dovish tone, San Francisco Fed President Mary Daly noted that inflation was much lower than feared and said that the weakening labor market looked worrisome if risks were not managed. Furthermore, Philadelphia Fed President Anna Paulson said in her first public address that she did not expect tariffs to lead to sustained inflation and added that she saw labor market risks rising.
If Powell hints that they need to continue easing policy in response to deteriorating labor market conditions, the USD could struggle to find demand. However, market positioning suggests that the USD does not have much room to weaken even if a December rate cut is fully priced in.
On the other hand, the USD could continue to outperform its rivals if Powell takes a cautious tone on consecutive rate cuts, citing uncertainty created by the lack of key inflation and employment data, as well as the possibility of a re-escalation of the US-China trade conflict. (alg)
Source: FXstreet
