There is a dislocation between the length to which the Fed may be willing to stimulate vs. the market’s expectations, writes Adam Button.
There's a mismatch between financial market's expectations and policymakers’ willingness to deliver and this dissent should come into sharp focus soon enough. The Japanese yen and Swiss franc were the top performing major currencies Tuesday while the U.S. dollar lagged (see chart below). The FOMC minutes from the Jul 31 rate hike are due up at 7 p.m. London time, 1 p.m. CDT. For a reminder of what the Fed said and reasoned on that day, please read on below.
Financial markets increasingly expect fiscal and monetary policymakers to stimulate the economy, but so far there's no clear signs such action is coming. It's a paradigm that plays out repeatedly during periods of economic slowdown and remains unresolved until market turmoil has manifested itself to spark genuine fears into policy makers.
Two big tests of whether we've come that far are coming up. The first test will be this afternoon’s release of Fed minutes from the July 30-31 meeting. These will undoubtedly skew hawkish because they were taken before the latest tariffs and market slide. They will also reflect Powell's assertions that the domestic economy is strong and that worries stem from trade and a foreign slowdown.
Here is what the FOMC did, Powell said and how markets reacted on Jul 31.
The second test will offer a current take as Powell delivers his Jackson Hole address. The market will demand a change in tone from Powell's July 31 press conference, but he's unlikely to be dovish enough to placate fears. On Tuesday, San Francisco Fed President Daly (not a voter at this year's FOMC) said she sees solid domestic momentum and a continuing expansion.
At the same time, fiscal hopes are also precarious. The lack of enthusiasm for U.S. tax cut talk underscores how difficult it will be to pass anything through Congress. In Italy, a snap election would risk an automatic VAT hike. The UK is a prime candidate for some fiscal help but is essentially paralyzed through the fall due to Brexit and the likelihood of an election. Canada also faces an October vote.
Adam Button is co-owner and managing director of ForexLive.com and a contributor at AshrafLaidi.com. You can see Ashraf’s daily analysis at www.AshrafLaidi.com and sign up for the Premium Insights. Ashraf's Tweet on indices here.
