Dollar Downed: The 3 components of the Powell Put
|- Fed Chair Jerome Powell sent markets soaring on a dovish twist.
- Here are his three dovish statements that also push the greenback lower.
On stage with his two immediate predecessors, Powell was initially pleased with the upbeat jobs report. The leap of 312K jobs and the acceleration of wages to a new cycle high of 3.2% were a double-edged sword for markets: the Fed may stick to its hawkish guns.
But Powell took a different path, sending stocks higher and downing the USD Dollar.
Here are the three critical dovish comments:
1) Patient on inflation
After talking about the upbeat labor market and wages, the world's most powerful central banker moved to the other mandate of the Fed: inflation. He stressed that inflation is low and added that his institution will need to be patient with the next moves.
He echoed the words of White House Economic Advisor Larry Kudlow which said price rises were minimal. This is a nod to Trump but also implies no rush to raise rates.
2) React quickly to changing conditions
Powell said that they are watching financial markets and their concerns. The next sentence coming out of his mouth was that the Fed is ready to change policy "quickly", something that sounded encouraging to markets and dollar bears.
While he did not make the direct correlation between the two sentences, the word "quickly" coming after talking about markets sound like the makings of a "Powell Put".
3) 180 degrees on the balance sheet
On December 19th, Powell said that the scheme to reduce the Fed's bloated balance sheet is on "autopilot." Markets have become addicted to money printing by central banks. The Fed increased its balance sheet to a peak of around $4.5 trillion before it ended the QE program but continued reinvesting the proceeds from maturing bonds. In late 2017, the central bank began reversing QE with QT: Quantitative Tightening, by not reinvesting some of its proceeds, and Powell insisted this policy will be left unchanged.
And just two weeks and two days later, Powell already begins singing a different tune. He said they could reconsider their policy on this, echoing the words of fellow FOMC member Robert Kaplan.
What's next?
All in all, Powell's potent potion of dovish comments understandably pushes the dollar down and stocks up.
Will this continue? The FOMC Meeting Minutes and the fresh inflation report in the first full week of January are critical to the next moves.
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