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Han de Jong, Chief Economist at ABN AMRO, points out that in his speech to the Economic Club of New York, Fed chair Jay Powell spoke mainly about the Fed’s framework for monitoring financial stability.

Key Quotes

“On the same day the Fed published its first semi-annual Financial Stability Report and Powell’s talk provided an overview of the key messages of the report.”

“The most important word in the speech was ‘just’. Markets for risky assets really liked that word and they rallied instantly. The sentence in which ‘just’ appeared read: “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy “” that is, neither speeding up nor slowing down growth”.”

“A key question for markets is how much further the Fed will raise rates. Not so long ago, Powell had said that rates were still a distance away from neutral. He now seems to have a slightly different view. The chairman obviously cannot be too explicit about policy intentions as he does not make policy all by himself. Any hint must therefore be subtle and not too explicit.”

“Another hike next month has been largely priced in and Powell did little to talk markets participants out of that view. But by adding the word ‘just’ about how far rates are away from neutral, Powell signalled that five more hikes in this cycle are unlikely. We had pencilled in three more hikes between now and the end of 2019 and none in 2020.”

“The conclusion we draw is that the expected December hike is likely to happen. Make no mistake, Powell did say, correctly, that US economic growth is currently robust. However, we now think that the Fed will only implement one more hike in 2019, some time during the first half.”