Fed Hike Aftermath Series: Federal Reserve chair Powell determined to abolish another recession era policy tool

Since December, the focus of the market participants has increasingly turned towards the monetary policy path of the U.S. Federal Reserve and to its new chairman Jerome Powell. The bond market was even pricing a 30 percent chance that the Fed will not hike rates.

The focus was on what signal comes from the Fed on future monetary policies. Chair Powell expressed confidence in the U.S. economy during the December press conference and signaled a pause in rate hikes and reduced forecast for 2019 by one notch to two rate hikes. When asked if Fed’s balance sheet is in play, Mr. Powell’s answer was that Fed wants to gradually and steadily do away with the balance sheet and focus more on the ‘interest rate’ tool.

Again speaking on Friday, Chair Powell signaled that there is no predetermined path to future interest rate hikes and balance sheet reduction could also be in play as a tool if necessary. The financial markets focused on balance sheet comments and pushed the USD lower against major trading counterparts.

However, what has gone largely unnoticed is that the Fed is abandoning another of its crisis-era tool, which is the forward guidance. As the Fed doesn’t want the markets to be overly dependent on the monetary policy decision, he is steadily insisting adding uncertainties to future rate hikes, which against the popular opinion we at FxWirePro believe to be a hawkish signal rather than dovish.