- The US Dollar fell after Powell's speech that was perceived as dovish.
- However, there are five reasons to see the greenback outperform its peers.
Markets jumped on the words "just below neutral" that Powell used to refer to interest rates. Stocks soared, and the US Dollar tumbled down. While a December hike is on the cards, the thinking was that Powell hinted that the central bank will soon pause.
However, here are five reasons to think differently:
1) What Trump said
With all the fuss about Powell's words and the non-stop news flow, it is easy to forget what US President Donald Trump said about the Fed Chair earlier this week. He complained about the Fed's rate hikes that it is not accommodating to Trump's policy and topped it off by saying he "is not pleased one bit" with Powell.
Powell's words may, therefore, be seen in this context, as taking some of the steam out of Trump's anger. By sending stocks higher, the White House may be off his back. The clash will likely continue, but it may return to the backburner after Powell sent the Dow Jones, Trump's favorite index, up by 600 points.
2) Just below, but exactly what?
Powell's exact words referred to interest rates being below the range of what is considered a neutral rate. Here is a quote (emphasis mine):
Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy.
That range is 2.50% to 3.50%. With the current Federal Funds Rate standing at 2.00-2.25%, we are close to the range. Nevertheless, the range is quite broad.
His words do not necessarily imply a halt after December, nor only one hike in 2019, as bond markets suggest at this juncture.
3) Neutral is not a ceiling
Powell and some of his colleagues repeatedly indicated that interest rates could temporarily go beyond neutral - rise above the level of inflation and therefore serve to tighten inflation. While he did not repeat it in his New York speech, the option to go beyond neutral is undoubtedly there.
4) Powell happy with the economy
The world's most powerful central banker did not use his long November 28th discourse to talk about headwinds in the economy. He is pleased with the rise in employment, wages, and growth.
Here is a quote (emphasis mine):
My FOMC colleagues and I, as well as many private-sector economists, are forecasting continued solid growth, low unemployment, and inflation near 2 percent.
In the last post FOMC meeting press conference he said that the economy is doing "very well." We can assume that he may omit the word "very," but he is still satisfied.
5) Powell not worried about the global economy, but he should
Some of his colleagues and other central bankers such as ECB President Mario Draghi have recently talked about global headwinds. Also, that was absent from his speech. Some of them referred to tariffs, a sensitive topic that Powell probably did not want to touch due to Trump.
Nevertheless, the euro zone's growth fell to 0.2% QoQ with stagnation in Italy and contraction in Germany. Chinese policymakers are raising concerns about more difficult times ahead. Emerging markets are struggling as well. The words "emerging markets" are nowhere to be seen in the text.
Regardless of Powell's words on the global economy or lack thereof, the US is in better shape than its peers and just being pleased about the US economy casts a shadow over others.
King Dollar is alive and kicking.
The Fed is not only on course to raise rates in December but also in 2019, reaching the broad range of neutral rates or beyond.
The party in markets and the fall of the greenback were premature, and there is room for greenback gains, perhaps even new highs against the weaker peers.
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