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Powell Quick Analysis: Dove defeats the dollar, without a strong NFP, forget about tapering

  • Federal Reserve Chair Jerome Powell has expressed a mixed message in his critical Jackson Hole speech.
  • He defies a long list of hawks calling for immediate withdrawal of stimulus.
  • The dollar's decline is justified and could be exacerbated. 

The last word belongs to the person on top – and he is a dove who is sending the dollar down. Federal Reserve Chair Jerome Powell has defied a vocal chorus of hawks among his colleagues and – as previewed by my colleague Joseph Trevisani – refrained from a hinting of tapering the bank's $120 billion/month bond-buying scheme. More greenbacks printed = a weaker currency.

Powell's message can be summarized with The Good, the Bad, and Ugly:

The Good: The outlook for labor has brightened considerably and this will likely continue. 

The Bad: Inflation is of concern, but could still moderate later on and the Fed has tools to respond. Inflation "should wash over time." 

The Ugly: The COVID-19 Delta variant is casting a dark shadow of uncertainty on the outlook. Powell dresses that in July, he was expecting it would be appropriate to taper this year, but Delta has caused him to cast doubts. 

Bottom line: Powell said nothing to hint of tapering, sending stocks up and the dollar down. 

Will this continue? The bank's next meeting is in mid-September and it is preceded by two critical releases related to the Fed's mandates – inflation and employment. The Next week's Nonfarm Payrolls critical is not only published earlier but consists of both a change in jobs and also a sign of inflation via wages. 

If the US gained close to one million jobs last month and earnings remain at an annual growth pace of 4%, tapering is on the table and the dollar may reclaim its throne. 

However, if the NFP is closer to 500,000 and salary rises slowly as expected, the Fed printing press will work at full steam and the dollar downfall will exacerbate. 

Earlier in the day, a long list of Fed officials spoke to the financial press and supported tapering. The list included known hawks such as Robert Kaplan and James Bullard, but also more cautious members such as Loretta Mester, Patrick Harker and Raphael Bostic. The blitz on Bloomberg and CNBC seemed like a coordinated effort at times. 

Those supporting withdrawing stimulus said that the conditions for reaching "substantial further progress" have been met and also talked about rapid price rises. However, the Fed's preferred gauge of inflation showed some signs of moderation. The Core Personal Consumption Expenditure (Core PCE) rose by 0.3% MoM in July and 3.6% YoY, as expected. 

Author

Yohay Elam

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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