Powell Signals Continuation – But Of Which Type?

The incoming Chair of the Federal Reserve does not intend to shake up the Federal Reserve. He has always voted with the majority and never made any speech that diverted from the Fed’s line. His 5 years as Governor will continue from the top seat. This is at least what he will tell Senators in Washington in his confirmation hearing. 

The text of his statement did not move currencies and we may probably need to wait until he enters office in February to really know what policy he will enact.

Dovish Fed or 2016 Fed?

The FOMC was quite dovish for quite some time: 0% interest rate, 3 large QE programs, and very gradual rate hikes. However, in 2017, the gradual nature has become somewhat less pronounced: we already had two rate hikes this year and another one is on the cards for December.

Yellen and her colleagues have been eyeing the excellent jobs market and have been shrugging off low inflation. At least until last week, when they began expressing greater concerns about the situation.

So, will Powell weigh the worsening inflation and refrain from hikes, at least in early 2018? According to bond markets, the Fed will not follow its dot-plot in 2018 and will raise rates only once, perhaps twice.

Yet not everybody thinks this is the line the Fed will adopt. Higher growth rates and higher employment may eventually manifest themselves into higher inflation.

As aforementioned, the US dollar did not react too much to the publication of the text. The politicians may ask him some questions, but as a lawyer and an experienced central banker, he may dodge them, not providing any real answers.