With inflation continuing to soar in the United States, expectations were high that the Fed would signal the end of quantitative easing as soon as possible.
This was all the more true as a number of other central banks announced or hinted at a quick end to QE.
Yet President Powell stuck by the same old conciliatory line and the reiterated cone is “still a long way off.”
Friday’s slow session wraps up a news-rich week that provided plenty of talking points. Central banks have been in the spotlight and the message has been mixed. On the one hand, the majority of banks relayed a hawkish message with the RBNZ’s announcement that quantitative easing will end this month, with the BoE’s Saunders saying that quantitative easing could end “next month. or the next two ”and the BoC reducing QE from another C $ billion to C $ 2 billion. On the other hand, the largest and most influential central bank, the Federal Reserve, has remained accommodating despite soaring US inflation. This has led to confusing action by US dollar prices and yields which both traded in a domestic week, seemingly caught between data suggesting a tightening should be due and a central bank refusing to move.
Powell stays put
Tuesday’s 5.4% US CPI index far exceeded expectations and sparked speculation that the Fed is giving a fairly quick signal that the QE cut is underway. With two speeches from Fed Chairman Jerome Powell, many believed there would be firm signals as early as this week. This triggered the US dollar to rally to July highs, but there was not to be a breakout as Powell remained surprisingly accommodating.
“President Powell, before the House Finance Committee, is not for change. Two things are still “far away”. One is “further substantial progress” and the other is the timing of the reduction in bond purchases, “noted ING.
The reasoning behind the stubborn dovishness, despite inflation rising again and exceeding 5%, is mainly due to the job market and the fight against low wages. Here’s what Powell said about it during his testimony:
“As noted in the Monetary Policy Report, the pandemic-induced job declines last year were most severe for low-wage workers and for African Americans and Hispanics. Despite substantial improvements for all racial and ethnic groups, the hardest hit groups still have the most ground to regain. “
Millions of jobs lost due to the pandemic have not been recovered, giving the Fed plenty of reasons to maintain the stimulus measures. Powell mentioned that the conditions required to end QE are “still a long way off”.
“At our June meeting, the committee discussed the economy’s progress towards our goals since we adopted our asset purchase guidance last December. While still a long way from meeting the “substantial further progress” standard, participants expect progress to continue. We will continue these discussions at future meetings. As we said, we will notify you in advance before we announce any decision to make any changes to our purchases. “
Expectations therefore shifted towards a decrease at the end of the year, with a probable start in December. What may have changed this week is that expectations for the speed of any cone have tilted towards faster runoff. This is mainly due to the RBNZ announcement that it will not even bother to cut its QE but will end it all at once later this month, an approach also favored by the BoE which could end his QE in a “month or two”.
“There is a lot to be said for a much faster reduction than expected. It needs to go from $ 120 billion in bond purchases per month to zero per month. From a purely technical point of view, there should be no typing and the Fed should just stop buying, ”notes ING.
Either way, this won’t help the USD continue its rally until there is a concrete announcement of the end of the stimulus and that doesn’t look likely this summer.