This is an opportunity to learn in real time about the pitfalls hidden in the communication of the US Federal Reserve Board (FRB). Let’s take a look at how the market reacted to Chairman Powell’s words regarding Wall Street’s role in controlling inflation.
A hike in the policy interest rate was postponed for the second consecutive meeting. The Fed chairman specifically cited the rise in U.S. bond yields as having an impact on tightening financial conditions. Going forward, he has hinted that he may act as a substitute for further rate hikes.
The yield on the two-year bond, which Mr. Powell mentioned by name, fell in response to his remarks. Yields on medium- and long-term bonds followed suit, contributing to calming market volatility that had recently made investors nervous. The volatile market was having ripple effects on the global economy, hurting asset prices, making it harder to buy a home, and raising operating costs for businesses.
The Federal Open Market Committee (FOMC) left open the option of further rate hikes in the future, citing strong economic growth. But in Powell’s view, high U.S. Treasury yields will instead help maintain subdued financial conditions, removing excess inflation from the business cycle.
FOMC suggests rising yields reduce the need for interest rate hikes – leaving options open (3)
That’s where the problem arises. If Mr. Powell’s comments lead to widespread belief that the aggressive tightening phase is over, and financial conditions become significantly looser, Fed officials will be forced into a no-win position.
“One of the problems the chairman has right now is that by making supportive statements to the market, stock prices go up and yields go down, which means financial conditions become looser,” Dudley, a former New York Fed president, said on Bloomberg Television. ” he points out. “This removes some of the factors that led to the decision not to tighten monetary policy further,” he explained.
Bloomberg US Financial Conditions Index
Source: Bloomberg
Chairman Powell did not rule out the possibility of resuming interest rate hikes in December at his press conference on the 1st, but traders pointed to the FOMC’s statement that “tighter financial and credit conditions for households and businesses are likely to increase economic activity, employment, “It is likely to have an impact on inflation.”
FOMC statement: Tightening of financial and credit conditions, potential impact on economy and prices
Jim Reid, head of Western credit strategy at Deutsche Bank, said: “If Mr. Powell considers the continued tightening of financial conditions to be “significant,” then the dovish market reaction the previous day was a sign that some hawkish “This could incite a counterattack, which is even more likely if the situation continues,” the report said.
Video: FOMC policy decisions
Source: Bloomberg
Standard Chartered estimates that tighter financing conditions could reduce economic growth by more than one percentage point over the next year.
“Mortgage rates and corporate and U.S. bond yields will rise, combined with a strong dollar and weaker stock prices, which are expected to weigh on the U.S. economy,” Dan Pang and other analysts at the bank said in a research note. pointed out. “The assumed risks of downside growth may be underestimated, especially if financial instability risks are not fully factored into stock and corporate bond market trends.” .
Original title:Powell Touts Tight Financial Conditions, Causing Them to Loosen(excerpt)
2023-11-02 17:12:00
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