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US Dollar Climbs As Fed Presidents Offer Hawkish View

US Dollar Climbs As Fed Presidents Offer Hawkish View

Daniel Dubrovsky, Contributing Senior Strategist


Talking Points:

  • Fed members Bullard, Harker, Lockhart and Evans delivered remarks on Thursday
  • The US Dollar recovered following yesterday’s post-Trump conference slide
  • Evans, Harker come off more hawkish on rate hikes, Bullard seemed more cautious

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The ICE Dollar Index (DXY) found some support from four Fed presidents speeches Thursday. This recovery on hawkish sentiment follows a notable slide after US President-elect Donald Trump’s press conference which fell short of the fundamental support for growth and monetary policy support he market seemed to have expect. First on the docket was St. Louis Fed President James Bullard, who is also a FOMC voter this year.

Mr. Bullard said that he felt the Fed can afford to be patient on rates as inflation is below their goal and he sees little acceleration. He was cautious and skeptical on what kind of governmental policies may be in store for the future. He went on to point out that there was little movement in Fed rate forecasts. The St. Louis Fed president also notably remarked that the FX market has gotten ahead of itself.

Additional comments from James Bullard:

  • Trying to understand what tax changes may mean
  • Some potential for U.S. growth to improve
  • Might see more investment in the U.S.
  • Not changing forecast for one rate hike in 2017
  • Expect to see action this year on Fed reform legislation
  • Health care, border tax policies carry some risks
  • Fed rates can remain fairly low in 2017
  • Job growth will slow in 2017, 2018
  • Unemployment to stay in the 4-5% range

Next on the schedule was Philadelphia Fed President Patrick Harker – who is also a FOMC voter in 2017. Harker struck a more optimistic tone as he reiterated his support for three modest hikes this year (the FOMC’s average forecast at the December meeting). He said that his forecast does not factor in fiscal policy changes as he mentioned that not enough certainty has given him reason to do so. The central banker also stressed that the participation rate is lower than he would like. As for the economy, he thinks that it is displaying considerable strength and that inflation is on track to meet the 2 percent target this year or next.

Additional comments from Patrick Harker:

  • Legislation needed to address falling participation
  • Labor market more or less at full health
  • Economic risks are very well balanced
  • Zero interest rates not normal, causes distortions
  • Economy can withstand slow, gradual hiking
  • Markets reacted to resolution of uncertainty after November 8th
  • I need a bit more data before deciding on next hike
  • First step on balance sheet is to just simply stop reinvestment

President of the Atlanta Fed Dennis Lockhart – who is not a FOMC voter this year – is in between Bullard and Harker, forecasting 2 hikes this year. Lockhart also sees a path of gradual rate hikes and that the definition of gradual will depend on the economy.

Additional comments from Dennis Lockhart:

  • Fed policy has limits, it cannot solve micro problems
  • Fed policy cannot address deep structural issues
  • Sees gradual hikes over 2-3 years
  • 4.6% - 4.7% feels like near, full employment level
  • Probabilities of recession are relatively low

Chicago Fed President Charles Evans – who is a FOMC voter in 2017 – is in line with the bank’s median 2017 estimate of 3 rate hikes. Evans also expects inflation to head towards the group’s 2 percent goal. He further mentioned that recent data on average hourly earnings was encouraging and that economic fundamentals remain strong.

Additional comments from Charles Evans:

  • Sees potential output growth about 1.75%
  • Business investment has been relatively weak
  • 4% growth hard without structural change
  • Central banks struggling with unconventional policies
  • Stronger fiscal policy may mean less Fed support needed
  • Recovery is extremely mature, labor market has improved
  • Getting closer to full employment, more normal times
  • Supports reinvestments until rate hikes well under way

Chart compiled in Tradingview

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