Powell Q&A: We’re not at the stage where bond rates need to be taken into policy

  • We’ve watched the run-up in bond rates and they’re nowhere near a year ago. We will see where they settle
  • We’ve all read decompositions on why yields have moved up but we think they’re about fewer downside risks and better growth (not inflation)
  • We don’t guess, speculate or assume on fiscal policy
  • Data has been stronger than expected in the inter-meeting period
  • Some of the downside risks have been taken away
  • Overall, we’re feeling good about economic activity
  • We had one inflation report that wasn’t as good as hoped
  • We will make a decision on rates in December when we get there
  • Jobs report wasn’t terrible but was worse than expected
  • The latest economic data has been strong
  • Policy is still restrictive but we feel it is still restrictive and labor market has cooled a great deal and is essentially in balance
  • We don’t need further cooling to achieve our goals
  • Powell says there is no signal in the removal of the line about “gaining greater confidence”
  • When we are at neutral, or close to neutral, we might slow the pace of rate cuts…something we are just beginning to think about
  • This isn’t a tight economy. A lot of the inflation we’ve seen this year has been catch-up inflation
  • Labor market is continuing to very gradually cool, is in a good place
  • The right way to find neutral is very carefully
  • We don’t think we need inflation to soften much to get inflation back to 2%
  • Powell says if he was asked to resign he wouldn’t
  • It will take some years of real wage gains for people to feel better about prices
  • We are going to move carefully as this goes on, to increase chances we’ll get it right
  • We don’t know where neutral is but we
  • Our baseline for next year is to gradually move rates towards neutral

The comment about the pace of rate cuts and getting back to neutral is dovish, that highlights a very high probability of a cut in December and continuing through 4% but it contrasts with the comment about moving carefully.

I think Powell is referring to 5% rates last October but I certainly wouldn’t say 10s are ‘nowhere near’ last year at this time.

This article was written by Adam Button at www.forexlive.com. Source