Markets welcome Fed speech aimd emerging market jitters

Alicia Cross
August 27, 2018

Forex dealers said a firm dollar in overseas markets, ahead of Federal Reserve Chairman Jerome Powell speech at the annual global central bank conference in Jackson Hole later in the day, weighed on the rupee.

The speech is the highlight of the annual gathering of global central bankers in Jackson Hole, Wyoming, an idyllic setting in the American West for serious discussions on how to manage the economy.

The Fed "has been navigating between the shoals of overheating and premature tightening with only a hazy view of what seem to be shifting navigational guides", Mr Powell said.

"The dollar's reaction is a part of a narrative that was established earlier this week, one that we saw in the minutes, with respect to the Fed making progress towards neutral", Mazen Issa, senior FX strategist at TD Securities in NY, said.

Given this uncertainty, Powell said, the Fed's current cautious approach is the right one. Others believe the economy will begin to slow, and that additional rate increases could exacerbate the slowdown.

There are no clear signs of inflation accelerating above 2 percent, meaning there is little or no risk of overheating.

Fed policymakers forecast three rate hikes for next year in their most recent projections, published in June. That could lead the Fed to change course from its gradual interest rate hike plan if Powell seems concerned that it could rattle the economy.

Part of Powell's rationale for raising rates is that with unemployment at 3.9 percent, inflation will not stay low forever, so rates need to rise somewhat.

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"Over the course of a long recovery, the US economy has strengthened substantially", Powell said.

Some economists believe the Fed is moving too slowly given the low unemployment in the United States, which could increase the bargaining power of workers to demand higher wages, stoking inflation. Australia's S&P ASX 200 edged 0.1 percent higher to 6,247.30. Where he stands on the pace of interest rate hikes will be scrutinised after minutes from the Fed's most recent policy meeting indicated the central bank would tighten monetary policy soon.

The president of the Fed inherited a well-defined and predictable strategy from his predecessor Janet Yellen to control the stimulus.

Despite putting USA consumers and companies on notice for higher borrowing costs, the Fed chairman said there was little sign of U.S. inflation rising above the 2% target.

Analysts said growing US political uncertainty, reinforced by the criminal conviction of one of Trump's ex-advisors this week, was keeping the dollar under pressure, despite the United States embarking on greater monetary tightening than elsewhere.

Point Bridge Capital Founder Hal Lambert, IHT Wealth Management President Steve Dudash and Payne Capital Management President Ryan Payne on the report that President Trump isn't "thrilled" with Federal Reserve Chairman Jerome Powell for raising rates.

The Fed is very confident in the USA economy and Mr Powell indicated there is no intention of slowing down the Fed's rate hikes, said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina. He further added the USA central bank should do more to help him to boost the economy.

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