Breaking: Fed chair Powell speech sends US Dollar lower

This is a developing story

Fed Chair Powell’s policy speech is a key event today:

Watch live: Fed Powell speech

In his first comments since the post-decision press conference on November 2, where he warned of a higher terminal rate, Fed chair Jerome Powell said today:

Key comments

Makes sense to moderate pace of interest rate hikes.
    
Time to moderate pace of rate hikes may come as soon as december meeting. 

Have made substantial progress toward 'sufficiently restrictive' policy, have more ground to cover.
 'It seems to me likely' rates must ultimately go 'somewhat higher' than policymakers thought in September.
    
 Likely to need to hold policy at restrictive level 'for some time'.
    
History cautions strongly against prematurely loosening policy.

We have a long way to go in restoring price stability.
    
We will stay the course until the job is done.
    
Inflation remains far too high.
    
October inflation data was 'welcome surprise,' will take 'substantially more evidence' to give comfort inflation is actually declining.
    
We estimate pce price index rose 6% in 12 months through october; core pce rose 5%.
    
 Path ahead for inflation 'highly uncertain'.
    
Growth in economic activity has slowed to well below longer-run trend, and this needs to be sustained.
    
Far too early to declare goods inflation vanquished, but if trend continues, goods prices should begin to exert downward pressure on overall inflation in coming months.
    
 Expect housing services inflation to begin falling sometime next year, if lease trends continue.
    
 Have so far seen only 'tentative' signs of moderation in labor demand, wage growth.
    
Moderation in labor demand growth will be required to restore labor market balance.
    
Price stability is fed's responsibility, bedrock of economy.

As a consequence of the dovish comments, futures tied to the Fed policy rate imply about a 75% chance of a 50bp hike in Dec vs a 25% chance of 75bp.

There will be a Q&A with further comments to follow:

Hard to pin down the natural rate of unemployment given disruption in labour market.

The initial surge of inflation not related to wages, but wages are going to be important going forward.

In the service sector, in particular, wages need to rise at a level consistent with 2% inflation over time.

Probably 1.5 to 2% above that now given adjustments for productivity.

JOLTS data today show a continued imbalance between demand and supply of workers.

There is a role in moderating demand to get the labor force back into balance.

For most workers now increases in wages are being offset by inflation.

JOLTS data today was more or less in line with expectations, decline in openings a positive.

A possibility labor market can return to balance through decline in job openings, still to early to tell .

Hard to pin down the natural rate of unemployment given disruption in labor market.
    
 In this situation Fed continues to think number of vacancies versus number of unemployed is important.
    
 Questions about elasticity of supply an important set of issues the fed is thinking about.
    
Has been that Fed could "look through" supply disruptions; not sure if that will continue.
    
 Fed still has a 2% inflation target it has to meet, even if supply conditions change.

Meanwhile, since the November 2 presser, markets have tuned into other Fed officials who have been framing the bank’s message. There have been conflicting tones from officials with, for instance, Fed vice chair Lael Brainard who has played up the move to smaller hikes, while others such as St Luis CEO, James Bullard, have played up the need for even higher rates. 

The November 2 FOMC statement seemed to hint at a pivot, but Chair Powell pushed back against such notions of a pivot during his press conference. 

''We believe he will take the same tone today; that is, the Fed may move to smaller hikes but the terminal rate is likely to be much higher than previously expected,'' analysts at Brown Brothers Harriman said. 

Fed's Powell said today, ''it seems to me likely' rates must ultimately go 'somewhat higher' than policymakers thought in September.''

US Dollar update

Nevertheless, the dollar index, DXY, has fallen on the initial release of the speech from the 107 area to test below 106.70. It remains above the low made of 106.29 on the day but was below the 20-year high of 114.78 on Sept. 28.  The greenback is on track for its biggest monthly loss since September 2010 as investors look toward the Fed reaching a peak rate early next year.

About Fed Jerome Powell

Jerome H. Powell took office as a member of the Board of Governors of the Federal Reserve System on May 25, 2012, to fill an unexpired term. On November 2, 2017, President Donald Trump nominated Powell to serve as the next Chairman of the Federal Reserve. Powell assumed office as Chair on February 5, 2018.