Australian dollar lifts as Fed’s Powell spooks the doves

See the latest Australian dollar analysis here:

Macro Afternoon

by Chris Becker

And there we have it. The United States Federal Reserve is transmitting loud and clear that it intends to cut rates to support the US and therefore global economy. In his testimony to the US Congress overnight, the Fed Chief Jerome Powell reiterated the central banks concern with the global economy, particularly because of Trump’s inane trade war with the US major partners:

Disagreement over interest rate policy could ease, however, as Mr Powell signalled that a cut could come soon in remarks that sent the S&P 500 surging past 3,000 points for the first time and prompting a fall in the dollar.

He told the committee that “uncertainties about the outlook have increased in recent months”. Although he expected continued US growth, he warned of economic weakness in other major economies, and a downturn in business investment driven by trade war worries.

“Concerns about the strength of the global economy continue to weigh on the US outlook,” Mr Powell said.

“Apparent progress on trade turned to greater uncertainty, and our contacts in business and agriculture reported heightened concerns over trade developments.”

This means a July rate cut is almost certain, by at least 25 basis points, maybe even more, but even James Bullard, the noted dove and St. Louis Federal Reserve President in a speech at the same time as Powell’s stated that 50 basis points would be “overdone” and that a 2nd cut later in the year should be enough.

The FOMC minutes were published at the same time and most of the members thought that rising risks from global concern and flagging business confidence supported a rate cut, but that such a cut would “risk financial imbalances”.

No duh. Like a stock market hell bent on blowing another bubble.

At least Powell has a spine, effectively telling Trump where to stick it if he threatens his position. From CNN:

California Democratic Rep. Maxine Waters pressed Powell at a House Financial Services Committee hearing about whether he would comply if he were to get a phone call from Trump asking him to pack up his stuff and go.
“Of course, I would not do that,” replied Powell, who was appointed by Trump.
“I can’t hear you,” said Waters in response to which the hearing room erupted in laughter.
“The answer would be, ‘No,'” Powell said.
Waters pressed further, asking, “Do you believe the President doesn’t have the authority?”
He replied: “What I have said is the law gives me a four-year term and I fully intend to serve it.”
The impact on the AUD was predictable:
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  1. The man wants to keep his job!

    (Even if it’s just as the market’s flunkey)

    Well done, Jerome – you told ’em

  2. Jumping jack flash

    Aha, so this is why they’re cutting the cash rate even though it makes no difference to anything except to increase private debt levels (if it even does do that).

    But the entire problem is the enormous mountain of mostly nonproductive debt that has been pushed onto the private sector. Private sector has no more capacity for this debt – well maybe a tiny bit, but certainly nothing like the capacity it had back in 2001 to 2006 when debt levels were still relatively low. Certainly 0.25% cuts to the cash rate, partially passed on to the people by the banks, are going to do sfa to increase debt capacity by any substantial amount.

    Nonproductive debt also has a net negative effect on the economy, which nobody seems to acknowledge because they’re banks, and debt is truly a great thing for banks, productive or otherwise, especially when the cash rate is 0% and QE is in place.

    This can also explain the need for 3rd world immigration (at least the initial purpose for it), they wanted to boost the numbers of people with high amounts of debt capacity. Unfortunately, businesses treated these people like slaves, and they simply didn’t get the capacity out of them that was expected, rather, wages were stolen to increase the debt of those who already had debt, so the effect was far less than if the all the debt newbies had taken on debt mountains to make someone else instantly rich.