USDJPY closed around 111.45 in the US session Wednesday, edged up almost +0.03%, but well-off the post Fed session low of 111.05 as Powell sounds less dovish than expected, described low core PCE inflation as “transitory”, not “persistent” and virtually trashed any possibility of a rate cut or launch of QE-4 in 2019 as expected by some market participants. In contrast, the Fed may launch QT-2 for longer term for the longer term UST for further balance sheet normalization. Dow (U.S. stocks) and bonds tumbled after Powell said the Fed "doesn't see a strong case for a rate move in either direction", pouring cold water on market expectations of a rate cut late 2019.
USDJPY jumped to a session high of 111.61 as the Fed chair Powell said in his presser/Q&A: “Transitory factors are behind the core PCE inflation at +1.6% in March. Some asset prices are elevated but not extremely so. Our baseline view remains that with a strong job market and continued growth, inflation will return to 2% over time. The neutral (patience) stance on policy still warranted and not seeing the case for moving policy in either direction”.
Prepared statement/opening remarks of Powell:
CHAIR POWELL: “Good afternoon, and welcome. At the Federal Open Market Committee (FOMC) meeting that concluded today, we reviewed economic and financial developments in the United States and around the world and decided to leave our policy interest rate unchanged”.
“My colleagues and I have one overarching goal: to use our monetary policy tools to sustain the economic expansion, with a strong job market and stable prices, for the benefit of the American people. Incoming data since our last meeting in March have been broadly in line with our expectations. Economic growth and job creation have both been a bit stronger than we anticipated, while inflation has been somewhat weaker. Overall, the economy continues on a healthy path, and the Committee believes that the current stance of policy is appropriate”.
“The Committee also believes that solid underlying fundamentals are supporting the economy, including accommodative financial conditions, high employment and job growth, rising wages, and strong consumer and business sentiment. Job gains rebounded in March after a weak reading in February and averaged 180,000 per month in the first quarter, well above the pace needed to absorb new entrants to the labor force. Although first-quarter gross domestic product (GDP) rose more than most forecasters had expected, growth in private consumption and business fixed investment slowed. Recent data suggest that these two components will bounce back, supporting our expectation of healthy GDP growth over the rest of the year”.
“The Committee is strongly committed to our symmetric 2 percent inflation objective. For much of this long expansion, inflation ran a bit below our 2 percent objective, alongside considerable slack in resource utilization. But last year, with the unemployment rate at or below 4 percent, inflation moved up. From March through December, core (PCE) inflation--which excludes volatile food and energy components--was at or very close to 2 percent. Overall inflation fluctuated from a few tenths above 2 percent to a few tenths below over this period, with the moves mostly due to changes in energy prices. As expected, overall inflation fell at the start of this year as earlier oil price declines worked through the system. Overall inflation for the 12 months ended in March was 1.5 percent”.
“Core (PCE) inflation unexpectedly fell as well, however, and as of March stood at 1.6 percent for the previous 12 months. We suspect that some transitory factors may be at work. Thus, our baseline view remains that, with a strong job market and continued growth, inflation will return to 2 percent over time and then be roughly symmetric around our longer-term objective”.
“At the start of the year, a number of cross-currents presented risks to the outlook, including weak global growth, particularly in China and Europe; the possibility of a disruptive Brexit; and uncertainty around unresolved trade negotiations. While concerns remain in all of these areas, it appears that risks have moderated somewhat. Global financial conditions have eased, supported in many places around the world by an accommodative shift in monetary policy, and in some cases fiscal policy”.
“Recent data from China and Europe show some improvement, and the prospect of a disorderly Brexit has been pushed off for now. Further, there are reports of progress in the trade talks between the United States and China. The Committee views these developments, along with the outlook for continued growth, a strong job market, and muted inflation pressures, as consistent with continued patience in assessing further adjustments in monetary policy”.
“Over the past several months, we have made a number of consequential decisions about our balance sheet. In January, we decided to continue implementing monetary policy using our current policy regime, which involves providing an ample supply of reserves. In March, we decided to slow the pace of balance sheet runoff starting this month, and to cease runoff entirely in September. These plans support our longer-run dual mandate objectives and also provide clarity about the path of our asset holdings”.
“Today, we had a preliminary discussion about the longer-run maturity composition of the portfolio. Before the financial crisis, our portfolio was weighted toward the shorter-term debt of the federal government. In the wake of the crisis, the Fed bought a large amount of longer-term securities with the aim of lowering longer-term interest rates and, thus supporting the recovery. Because of these purchases, our portfolio is now weighted toward longer-term securities. As part of normalization, we will have to decide what the maturity structure should be in the longer term. This choice raises many complex issues and has possible implications for the stance of policy”.
“Today’s preliminary discussion laid the groundwork for more complete analysis and discussion, and we plan to return to the maturity composition question toward the end of the year. There is no pressing need to resolve this matter, however, and any decisions we ultimately reach will be implemented with considerable advance notice and in a manner that allows for smooth adjustment. As we have often emphasized, adjustments to the balance sheet normalization process may well be needed as the process unfolds”.
“Finally, we made a small technical adjustment in one of our tools for implementing monetary policy--the interest rate on excess reserves, or IOER rate. The change does not reflect any shift in the intended stance of monetary policy. We use the IOER rate to help keep the federal funds rate (trading) in our target range. As balance sheet normalization continues, we have expected that the effective federal funds rate would shift up over time relative to the IOER rate”.
“Last year, we twice lowered the IOER rate by 5 basis points relative to the top of the target range after the federal funds rate moved toward the top of the range. These actions helped to keep the effective federal funds rate well within the target range. Today we made one more such change. The target range for the federal funds rate is our main indicator of the stance of policy, and it remains unchanged”.
Overall, Powell was hawkish about US economic growth and job market while little dovish about inflation, but sees the fall of US core PCE inflation as “transient” (temporary), while expressed strong confidence of returning of the same (core PCE inflation) to Fed’s 2% symmetrical target and also indicated QT-2 (balance sheet tapering for longer-term US securities/UST).
Although Powell has downplayed any significance of the IOER cut, this may be a direct response to the relatively increasing scarcity of reserves (USD liquidity shortage) amid the balance sheet runoff. The Fed is still running partial QT and also backdoor QE (as it still reinvests to some extent), but it will soon launch QT-2.
Summary of Powell comments in his presser and Q&A:
“The IOER cut doesn’t signal a shift in monetary policy and we ignore short-term political (Trump) considerations. Economic & job growth has been stronger than expected, while inflation has been somewhat weaker. Overall risks abroad have eased slightly, while China, European data has shown some improvement. Patient stance on policy still warranted and not seeing the case for moving policy in either direction. The Fed is non-political, doesn’t take President Trump’s comments into account. The Fed will use tools to control fed funds if needed. We don't see any evidence at all of overheating”.
Powell added: “We don't see a strong case for moving in either direction. Our baseline view remains that with a strong job market and continued growth, inflation will return to 2% over time. The incoming data have been broadly in-line with expectations, while jobs and growth data has been a bit stronger than our expectations, but inflation has been a bit weaker. We suspect some transitory factors are at work with inflation at 1.5%. The global financial conditions have eased and risks around outlook have diminished. There are reports of progress in US-China trade talks, while Brexit risks have been pushed off for now. China and Europe have shown some improvement”.
In the presser, Powell twice talked about Dallas Fed’s trimmed mean PCE inflation rate, much less volatile than core PCE inflation.
Powell argued, pointing to an alternative measure- the Dallas Fed trimmed mean-as evidence: “It cuts off the big movements on the upside and the downside, looks at the mean movements of inflation on the various product and service categories, and it didn’t go down at all. The underlying inflation may not be falling as much as the core PCE price index shows”.
As a pointer, the 12-month headline PCE inflation was at +1.5% in March’19, the core PCE inflation (which Fed tracks) was at 1.6%, while the Dallas Fed’s core trimmed mean PCE inflation was at 2.0%. In Q1-2019, the average core PCE inflation was at +1.7%, but the average core trimmed mean inflation was at +1.9%. In Q4-2018, the average core PCE inflation was at +1.9%, while the core trimmed mean inflation was at 2.0%.
On Wednesday, Powell actually tried to justify his reasoning about transitory forces, depressing the core PCE inflation. The market was expecting that because of the recent spate of weaker core PCE inflation, the Fed may cut in late 2019. But Powell virtually trashed that idea by saying that the Fed sees those lower inflation readings as a result of some transitory factors like lower portfolio management services, lower apparel prices and lower airfares (as a result of lower ATF/oil). Powell said: “We suspect transitory factors may be at work”.
But, Powell also said if Fed sees core PCE inflation running consistently below Fed’s 2% symmetrical target, the Fed may consider an appropriate policy action (i.e. cut).
Powell argued about the great inflation mystery like Yellen a few years back: “So we don’t know, again, until we see, but there’s a reason to think that those (that) would be transient would turn around. I will point to the case of cellphone services. Many of you will remember (that) in March 2017, there was a very low reading for cellphone services, mobile-phone services, and it was kind of a price war, and it dragged down core inflation for a full year, but it did not look like something that would be repeated. (But) if we did see inflation running persistently below, that is something the committee would be concerned about and something we would take into account (in) setting policy”.
The Fed chair Powell is frequently changing his inflation goal-post to justify any policy rate action or inaction. In March meeting, Powell talked about mostly the lower headline inflation at +1.5% to justify Fed’s sudden flip-flops (withdrawal of 2 rate hike projections for 2019), maybe Trump’s pressure has worked.
In April/May, Powell again talked about the US core PCE inflation, the official measurement of inflation that the Fed considers in its monetary policy settings. But this time Powell also brings another inflation measurement the Dallas Fed core trimmed PCE inflation, most probably to counter growing pressure from Trump & Co for rate cuts on lower inflation and launch of QE-4 to stimulate the US economy like China.
On Tuesday, Trump tried his best publicly in an unprecedented way to influence Fed’s decision just ahead of the Wednesday Fed outcome and urged for 1% rate cut with QE-4 like Chinese stimulus. Trump tweeted:
“China is adding great stimulus to its economy while at the same time keeping interested rates low. Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go... up like a rocket if we did some lowering of rates, like one point, and some quantitative easing. Yes, we are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!”
The market is also concerned about Trump’s consistent attack/criticism and interfering on the Fed, which was also one of the primary reasons behind December plunge. The Fed has now united against Trump tantrum as even so-called doves will oppose Trump’s consistent attempt to influence the central bank policy. As Trump is now under immense political pressure after Muller’s report, the Fed will oppose Trump’s view on monetary policy pro-actively for the sake of central bank autonomy.
The Fed is answerable only to the US Congress and not to the US President and we may see a hawkish Fed late 2019, just ahead of the US Presidential election in 2020 contrary to Trump’s attempt to cut the interest rate and launch QE-4.
Technically, whatever may be the narrative, USDJPY now has to sustain over 111.00 for a further rally to 111.75/111.95-112.15*/112.50 and 112.95/113.50-114.00/114.55* in the near term (under bullish case scenario).
On the flip side, sustaining below 110.80-110.60*, USDJPY may further fall to 110.00/109.70*-109.00/108.50* and 108.00/107.70*-107.00/106.40 in the near term (under bear case scenario).
Earlier before the Powell speech, USDJPY inched down on dovish hold by Fed as it cuts IOER by 0.05% and flags weak core inflation for the neutral mode.
USDJPY slips to a session low of around 111.05 in the US session Wednesday, slumped -0.33% on a dovish hold by Fed as it cuts IOER by -0.05% to 2.35%, holding rates at +2.375%, and flags weak core inflation for the neutral mode, but also cited solid economic activity (headline GDP growth rate of +3.2% in Q1), while removes reference to low inflation being due to energy prices. The Fed said overall core inflation has declined on a 12-month basis and survey-based measures of longer-term inflation expectations are little changed. The Fed said jobs gains have been solid, but the growth of household spending and business fixed investment has slowed.
As a pointer, the recent surge in USD was largely a result of the familiar story of dollar shortage after Effective Fed Fund Rate (EFFR) goes higher than the IOER (Interest on Excess Reserve). Thus soon after Fed decision, USD slips to some extent as almost all the above Fed stance was in expected line. But USD soon recovered from the session low of 111.05 and made a high of 111.61 as Powell said: “transitory factors behind headline inflation at +1.5% in February and asset prices are elevated but not extreme”.
FOMC statement: 1st May 2019
“Information received since the Federal Open Market Committee met in March indicates that the labor market remains strong and that economic activity rose at a solid rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Growth of household spending and business fixed investment slowed in the first quarter. On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed”.
“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes”.
“In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments”.
Decisions Regarding Monetary Policy Implementation
“The Board of Governors of the Federal Reserve System voted unanimously to set the interest rate paid on required and excess reserve balances at 2.35 percent, effective May 2, 2019. Setting the interest rate paid on required and excess reserve balances 15 basis points below the top of the target range for the federal funds rate is intended to foster trading in the federal funds market at rates well within the FOMC's target range”.
“Effective May 2, 2019, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $15 billion. The Committee directs the Desk to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $20 billion. Small deviations from these amounts for operational reasons are acceptable”.
Pivot: 111 Support: 110.6 110 109.7 Resistance: 111.75 111.95 112.15 Scenario 1: Strong above 111.00 and sustaining above 111.75/111.95-112.15*/112.50, USDJPY may further surge to 112.95/113.50-114.00/114.55* in the near term Scenario 2: Weak below 110.80-110.60* and sustaining below 110.00/109.70*-109.00/108.50*, USDJPY may further plunge to 108.00/107.70*-107.00/106.40 in the near term Comment: Short term range: 108.50/110.60-112.50/114.55