Powell Quick Analysis: Three hawkish points propel dollar, NFP critical to cement tapering

  • Fed Chair Powell surprised by signaling taper announcement could come in November. 
  • Tapering may end by mid-2022, opening the door to earlier rate hikes. 
  • Powell's comment on employment goal "all but met" is a significant hawkish shift. 
  • Only weak Nonfarm Payrolls could push taper back to December.

The dove has surrendered to circling hawks – that is the impression one can get from listening to Federal Reserve Chair Jerome Powell in his critical press conference. The usually cautious Fed Chair laid down three critical signals that lift the dollar. 

1) November taper: 

Powell said that the "language flags bar for taper could be met as soon as next meeting" – a direct statement on a taper coming in November is undoubtedly a hawkish shift. The Fed Chair does not even signal that more data is needed, nor new forecasts, due in December. Printing fewer dollars earlier mean a stronger greenback.

2) Taper ending in mid-2022

"Taper could conclude around the middle of next year" – this comment is another direct indication on when the Fed's balance sheet will stop growing – kicking off the countdown toward raising interest rates. While Powell tried to delink the end of tapering to the "liftoff," the greenback is taking off. Higher interest rates make the dollar more attractive. 

3) Employment comment

As mentioned earlier, the Fed Chair is a dove, backing more support to the economy, while the hawks want to withdraw stimulus sooner. He said that many on the FOMC see that the "substantial further progress" test on employment has been met. His view is that it is "all but met." 

Nevertheless, Powell previously stressed that millions remain out of work, and now he sees the labor market as almost there

This last point also provides a hint to where the Fed could back off – the next Nonfarm Payrolls report. Powell said that it would take a "decent employment report" for him to begin tapering. It would take a disastrous NFP to prevent tapering. Such a scenario cannot be ruled out, but these comments mean that October 8 release is critical. 

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