Published: Mon, August 27, 2018
Markets | By Terence Owen

As Trump goes low, Fed goes high

As Trump goes low, Fed goes high

"There is good reason to expect that this strong performance will continue", Powell said Friday in remarks prepared for the Kansas City Fed's annual policy symposium in Jackson Hole, Wyoming.

The Fed in June increased interest rates for the second time this year, and pencilled in two more rate hikes for the year. With unemployment so low, "why isn't the (Federal Open Market Committee) tightening monetary policy more sharply to head off overheating and inflation?"

Mazen Issa, senior FX strategist at TD Securities in NY, said Powell's remarks built on a stance seen in the minutes of the Fed's latest policy meeting released on Wednesday.

"Global risk sentiment remains somewhat jittery ahead of Fed Chair Powell's speech with US-Sino trade talks failing to yield any immediate progress", strategists at OCBC Bank wrote.

"Any comments on current Fed policy will draw even more than the usual attention given recent and unprecedented criticism of the Fed by President Trump", Larry Hatheway, chief economist at GAM Investments, told Bloomberg News.

St. Louis Federal Reserve President James Bullard does not want the central bank to raise rates again this year.

At the same time, Powell is having to navigate an increasingly turbulent political scene, with a President who is becoming more and more willing to publicly criticize his own nominee for raising interest rates as the election nears. mid-term.

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"He is crystal clear here that while he understands that all those economic principals are important, he is not going to let current estimates of those things be the dominant driver of interest rates", said Robert Martin, executive director at UBS Securities LLC and a former Fed board staff economist.

The Fed seems to be "doing as good a job as they cannot to overshoot" the tightening of monetary policy, said David Levy of Republic Wealth Advisors. Unemployment is low at 3.9 per cent, and inflation, according to the Fed's preferred benchmark, is slightly above officials' 2 per cent target.

As the Fed comes closer to ending its rate hikes, and the other central banks start to raise rates especially the European Central Bank, the dollar will eventually weaken.

Analysts said growing U.S. political uncertainty, reinforced by the criminal convictions of two of Trump's ex-advisors this week, was keeping the dollar under pressure, despite the United States embarking on greater monetary tightening than elsewhere. The president has complained that the Fed's tightening of credit could threaten the continued strong growth he aims to achieve through the tax cuts enacted late past year, a pullback of regulations and a rewriting of trade deals to better serve the United States. The rate hikes are meant to prevent the economy from overheating and inflation from accelerating.

European stocks look set to open largely unchanged on Friday as trade talks between the US and China ended without progress, raising concerns that a prolonged trade spat could hurt global growth. The government also said Friday it was removing limits on foreign ownership of its banks.

Though Powell chose not to mention Trump's criticism, other Fed officials asserted that the president's complaints about rate hikes would have no effect on their policymaking.

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