Fed Brainard dovish speech: No rate hike next week?

Despite the economic progress in the US, Fed Brainard dovish speech prompted the Fed to remain a loose policy and not to move too fast on rate hikes. Will we still witness a rate hike this year?

12 September, AtoZForex – Traders were eyeing the commentaries of Fed Governor Lael Brainard, as it is the last Fed official to reveal her thoughts before the FOMC meeting of next week. The Fed governor could have hinted at a Fed rate hike, which would send the USD up. Instead, Fed Brainard dovish speech called for prudence in the Fed’s interest rate policy. Amid the hawkish jitters of John Williams, Eric Rosengren and other Fed officials for a gradual Fed rate hike path, Lael Brainard stated a more cautious and dovish tone.

Worries about China and emerging markets

The advise of Fed Brainard to move too quickly on rate hikes, stems from the concerns about the global difficulties and its impact it will have on the US economy. Specifically, the Fed Governor pointed out to the worries in China and the emerging markets:

“Foreign consumption and investment are weak, while foreign demand for savings is high, along with an elevated demand for safe assets. Downside risks are also present in emerging market economies, where growth has slowed rapidly in recent years. Most importantly, China is undergoing a challenging transition from a growth model based on investment.”

More concerns for US inflation undershooting

During the Chicago Council on Global Affairs, Lael Brainard also pointed out that there are more reasons to be concerned about US inflation undershooting rather than overshooting. Even though the US labor markets signal to be strong, the inadequate level of inflation pressures “makes the case to tighten policy preemptively is less compelling,” Fed Brainard said. On top of this, the disinflation pressure along with a weaker demand from overseas will continue to pressure on the US outlook.

Based on the muted US inflation and the uncertain developments, Fed Brainard counsels: “Prudence in the removal of policy accommodation. I believe this approach has served us well in recent months, helping to support continued gains in employment and progress on inflation.”

Although, the Fed Brainard dovish speech did not rule a September rate hike by 100%, her cautious tone made the probability of rate hike this month to drop from 19% to 11%. Fending off the market’s speculation of her sending a hawkish message to unite with the other Fed officials, in order to increase the odds of a September Fed rate hike.

Think we missed something? Let us know in the comments section below.

    Share Your Opinion, Write a Comment