The FOMC press conference provided a key reversal for the dollar and risk assets. Fed Chair Powell’s comment that some transitory factors may be at work in inflation and that it will pick up triggered massive dollar buying. The dovish statement quickly became yesterday’s news after inflation appears to be transient for the Fed. Fed fund futures rate cut expectations for the September meeting fell from 50% to 39% following the comments on inflation.
Powell’s press conference did not deviate much from recent Fed speak. Current policy is appropriate and on balance, financial vulnerabilities are moderate. Regarding the President’s tweets about calls for rate cuts or more QE, Powell noted, “We don’t consider short-term politics in our decisions.” Powell sees no strong need to move interest rates either way and we should not be surprised if we do see an uptick with inflation in the coming months that rate cut calls will fade even further. Expectations are at 60% for the Fed to cut rates at the December meeting.
On the economy, Powell dismissed the weakness shown in this morning’s ISM reading and stated it was positive and shows modest growth. He expects consumer and business spending to support growth this year.