Jargon used when discussing central bank decision making and communication normally involves the words ‘dovish’ or ‘hawkish’. Descriptions of a dovish decision or attitude refer to the central bank steering away from tighter monetary policy and higher rates on interest. By contrast, decisions and commentary described as hawkish refer to a central bank that appears to be opting for tighter monetary policy than the market was expecting. Tighter policy always refers to less abundant credit and borrowing conditions characterised by higher rates and a shrinking balance sheet at the central bank. Looser policy refers to easier credit conditions and a lower cost of borrowing, signalling a central bank less concerned with lowering the rate of inflation and potentially even trying to raise it.
Jargon buster over: last night’s decision by the Federal Reserve was just about as hawkish as possible whilst not raising rates presently. Is it challenging to convey to the market a hawkish tone during a decision in which you take a pause from a 15-month long and very aggressive rate hiking cycle. The erosion in USD value over the past few trading sessions as data was released foreshadowing the pause stands as testimony to this challenge. However, looking at the reaction in the FX and Bond markets overnight, Jay Powell appears to have done just that – threaded the needle to deliver to markets the hawkish pause.
The key elements that created the impression of a hawkish rhetoric despite the decision not to hike rates were as follows: firstly, the publications and press conference made it clear that the expectation of future hikes to come were shared across the majority of the FOMC, not just by the Chair. Secondly, confirmation that the July meeting would be ‘live’ suggested the next hike may come as soon as next month. Lastly, at every opportunity the Chair reminded us that this pause was an opportunity to allow data to catch up with monetary adjustment to date and thereby allow the monetary authority the opportunity to assess the requirement for further action. Following the Fed, markets await today’s ECB decision where a 25-basis point hike is virtually unanimously expected.
Discussion and Analysis by Charles Porter
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