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Chris Turner, global head of strategy and head of EMEA and LATAM research at ING, suggests that in today’s Congressional testimony on monetary policy of Fed Chair Jay Powell, his remarks are expected to shed further light on why the Fed shifted to a data-dependent approach in January and cement views of a Fed pause.

Key Quotes

“At the same time, his remarks should echo the dialogue in the most recent FOMC minutes which suggested the Fed would stop quantitative tightening (shrinking its balance sheet) later this year. Recall the Fed had received some criticism (including from President Trump) that the US$50 billion monthly reductions in its balance sheet was unduly tightening financial conditions and weighing on risk assets.”

“ING’s house view believes the current Fed pause could resolve itself in one last rate hike – perhaps in 3Q19. However, the bar to that hike looks quite high and the Fed pause could easily turn into something longer – such as the twelve month pause in Fed rates seen between summer 2006 and summer 2007. The Fed Fund futures strip certainly prices that story, with the next full 25 basis point Fed move (a cut) not priced until summer 2021.”

“If the Fed is to be embarking on a long pause, the evidence of 2006 suggests that FX traded volatility levels can fall further – at least until there are clearer signs of a broader slowdown in activity, including the US.”