Fed Commentary Doesn’t Offer Definitive Dollar Move Before NFPs
- Dollar unable to capitalize on Fischer’s and Lockhart’s hawkish commentary
- Both central bankers believe inflation is not far away from the 2% target
- Fed Funds futures are pricing a 58% probability of a December rate hike after the speeches
There were six Fed speeches over the past 24 hours, and half of them weighed directly in on monetary policy. Yet, unlike the market response we saw to Chair Janet Yellen’s comments earlier this week, the US Dollar seemed unable to move on the moderately hawkish remarks. Vice Chairman Stanley Fischer spoke to his views on inflation and wage growth during his speech in Washington. He believes that there is not much evidence that inflation measures are a too low and that the 2 percent threshold is not far away.
The Federal Reserve has maintained that it wants to see expectations of wage growth increase as per its dual mandate objective. The central banker said that low productivity is holding back wage gains but he foresees regaining traction in the labor market.
Atlanta Fed President Dennis Lockhart held a similar view to his fellow FOMC member. The central banker believes that inflation expectations will remain anchored. This may be part of the reason why he thinks “it will soon be appropriate” to start the rate hike process.
Among skeptics, a key reasoning for the Federal Reserve to not hike interest rates is the risk of an international economic slowdown. Lockhart touched on this view when he said that the risks the FOMC faced in the September and October policy meetings will subside. He held the data-dependent stance for policy evaluation saying small changes in economic forecast may stay the hand of the central bank.
St. Louis Fed President James Bullard took the hawkish stance as well in his speech. He said the aggregate progress of the domestic economy warrants a move from the zero rate policy. In the Bullard’s view, an increase of 100,000 to 125,000 jobs is sufficient but may be seen as a slowdown after months of substantial job growth. The central banker noted that a possible December rate hike in the latest Fed statement was used to “reel” back investors’ expectations of FOMC monetary policy.
The probability of an increase in the Federal Funds rate at the December meeting stands at 58 percent - little changed after these comments, ADP employment numbers and non-farm productivity figures surpassed the markets’ expectations.
Highlights from Fischer’s speech:
- Fed is not that far from 2 percent inflation target
- Fed independence helped anchor inflation expectations
- Says monetary policy is already very transparent
- Low productivity growth holding back wages gains
Highlights from Lockhart’s speech:
- Says case for liftoff will continue to firm up, liftoff will soon be appropriate
- Says inflation expectations fairly well anchored
- Expects risk that faced in Sept., Oct, to subside
- Small forecast changes could warrant longer at zero
Highlights from Bullard’s speech:
- Fed faces challenge in explaining a slowdown in job growth is natural
- Job growth of 100,000 to 250,000 is sufficient for economy
- Aggregate progress of the economy warrants a move from zero rate policy
- A possible December rate hike in latest Fed Statement was used to adjust investors doubts
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