Fed Preview: Three ways in which Powell could down the dollar, and none is the dot-plot

  • The Federal Reserve is set to refrain from tapering bond-buying and signal a delay.
  • Indicating that withdrawing stimulus would be lengthy could also weigh on the dollar. 
  • Fed Chair Powell may opt to stress the separation between bond-buying and rate hikes.

No taper now, but when? That is the main question investors have for the Federal Reserve in its all-important September meeting. The bank buys $120 billion worth of bonds every month and it is set to reduce the pace at some point – the first step toward raising interest rates. Timing is everything.

Downbeat data empowers doves

Back in August, Fed Chair Jerome Powell already indicated that a "Septaper" is off the agenda, citing the spread of the Delta COVID-19 variant as a critical factor. Since his August 27 speech, the bank's two mandates – employment and inflation – have softened, vindicating his dovish approach.

August's Nonfarm Payrolls report badly disappointed, showing an increase of only 235,000 jobs. That figure would have been satisfactory in pre-pandemic days, but it is far from reflecting a recovery that justifies any tightening.

NFP disappointment:

Source: FXStreet

The Core Consumer Price Index (Core PCI) for last month also surprised to the downside, decelerating to 4%. That seems to vindicate Powell's insistence that inflation is transitory – the result of bottlenecks originating from the rapid reopening.

Inflation is off the highs:

Source: FXStreet

Powell more important than dot-plot

Nevertheless, while Powell is the leader, he is not alone, and hawks would like to take the pedal off the printing press. Members eligible to vote this year may dissent by voting for immediate tapering while others could opt to raise their projections for when interest rates may rise. 

However, both Robert Kaplan and James Bullard – the most vocal hawks – are not voters this year. Regarding signaling rate hikes via the dot-plot, that already happened in June, and there is little chance of a repeat. Back then, the Fed shifted from signaling a rate hike in 2024 to indicating two increases in borrowing costs in 2023. Changes to growth, inflation and employment outlooks carry less weight with markets.

Overall, with the lack of a taper decision and little chances of surprises in the dot-plot, the focus is on Fed Chair Powell's words.

Here are three ways the uber-dove could down the dollar.

1) Hint toward December

As mentioned at the outset, the taper timing is critical. Will it come in the following November meeting or only in December? Powell promised to give markets a heads-up "well in advance." Does his Jackson Hole speech count as a pre-announcement? That remains unclear, and he could use the September meeting to signal that it is still "a ways off." 

Powell could point to softer inflation figures and more importantly, uncertainty about the labor market. August's weak NFP, uncertainty about the virus' spread and the fact that millions of Americans have yet to return to work would fuel Powell's arguments to wait longer. 

Prospects of more dollars printed would weigh on the greenback.

2) Paint-dry taper

Giving markets an advance notice could also consist of details about the pace of the Fed's tapering. How soon will the bank decelerate from $120 billion to 0? Some speculate it could take eight months, but the Fed could spread it out over a longer period of time. 

Powell's predecessor at the Fed's helm, Janet Yellen, once referred to the shrinking of the Fed's balance sheet as "watching paint dry" – a boring process. By signaling it could take ten or even 12 months, Powell would further soothe markets.

3) Delink rate hikes from tapering

Markets are not only worried by the slower pace of dollar creation but about what comes afterward – rate hikes. When borrowing costs rise, investing in stocks becomes less attractive and the dollar rises. Stopping to expand the Fed's balance sheet would be followed by a hike, but there is a gap between the two events.

Several Fed officials have already talked about rate rises as a separate event. As part of preparing markets for tapering, Powell could take an extra step and emphasize that between the end of tapering and raising rates, there would be a long wait. He could use the words "considerable" or "patience" that Yellen used, or pick a new term.

Forward guidance that interest rates would stay lower for longer would also weigh on the dollar.

Overall, Powell has good reasons to wait, he is a dove, and has the tools above to soothe markets. The central scenario is for Powell to down the dollar.

The alternative hawkish scenario

Lower probability outcomes would be focusing on the fact that inflation still remains high and that global supply bottlenecks seem to persist and push prices higher. Prospects of higher inflation would embolden the hawks to demand a taper decision sooner than later and they could pressure Powell. 

On the labor front, one could argue that while America is yet to reach full employment, average job gains in recent months point to reaching that goal, enough to warrant withdrawing some stimulus. That is probably not Powell's thinking, but he could be cornered. 

In this more hawkish scenario, the dollar would rise as markets would begin pricing a November taper announcement and rate hikes coming in early 2023 or even beforehand. However, the chances are lower.


The Fed is set to leave its policy unchanged but hint about the next steps. There is a high chance that Chair Powell conveys a dovish message, downing the dollar. 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news

Latest Forex Analysis

Latest Forex Analysis

Editors’ Picks

EUR/USD retreats to 1.1350 on firmer yields, ECB Minutes eyed

EUR/USD is trading around 1.1350, paring back gains amid a rebound in the US dollar. The data published by Eurostat showed on Thursday that the annual CPI in the euro area was 5% in December, matching the market expectation and the flash estimate. Investors await ECB's December Meeting Accounts and mid-tier US data.


GBP/USD consolidates below 1.3650 as US dollar tracks yields higher

GBP/USD is consolidating gains below 1.3650, as firmer Treasury yields fuel a rebound in the US dollar across the board. Looming UK political and Brexit uncertainties limit the pair's upside. Hotter inflation in Britain keeps the BOE rate hike expectations intact. 


GBP/USD consolidates below 1.3650 as US dollar tracks yields higher

GBP/USD is consolidating gains below 1.3650, as firmer Treasury yields fuel a rebound in the US dollar across the board. Looming UK political and Brexit uncertainties limit the pair's upside. Hotter inflation in Britain keeps the BOE rate hike expectations intact. 


Gold keeps its sight on $1,850 bullish target

Gold price has stalled its upsurge, consolidating below two-month highs of $1,844 amid firmer yields. China’s policy easing driven risk-on mood also limits gold’s gains. Although decade-high inflation rates globally have gold bulls covered. 

Gold News

Dogecoin price eyes 30% gains as DOGE bulls put an end to retracement

DOGE price has seen three major uptrends face blockade around the same hurdle. The most recent rally failed to breach this barrier, leading to a steep correction. 

Read more