Financial markets are getting tired of Fed representatives’ refrains about patience

Rehearsal makes perfect. Jerome Powell said word “patience” five times in his speech at the Economic Club of Washington. The Fed capacity to be patient was stressed by Richard Clarida, who emphasized that the borrowing cost, being at the lower limit of the interest rate neutral range, neither boosted economic growth nor hindered it. The markets have heard and know about all of this, and so they preferred more or less new phrases. For example, the information that the US government shutdown is likely to be reflected in the incoming data; and the Federal Reserve will find it difficult to learn about the U.S. economy performance if the necessary information is not provided.

Jerome Powell noted that the unplanned vacations of the executive power were short in the past, so they had little influence on the U.S. GDP. This time the break in the work of the government lasts too long. In general, the chairman and the vice chairman said nothing new, and left the issue of federal funds rate hikes uncertain, having stressed the necessity for a long pause in the monetary normalizing process. The same view point is shared by the Wall Street Journal experts. 28.7% out of 73 economists believe that the Fed will tighten its monetary policy in March, 11% tend to May, 39.7% vote for June, 2.7%- July, 8.2% - September, 1.4% suggest October, and 2.7% 0 December. Median forecast for the rate in late 2019 is 2.75%, compared to 2.89% in December poll.

Experts assess the US GDP growth rate in 2019 at 2.2% (in October, it was 2.4%), which roughly corresponds to the Fed projections at 2.3%, in contrast to the White House opinion, asserting that the U.S. economy is capable of keeping the growth rate at 3%. Experts suggest 25% likelihood of a recession, which is the highest value since 2011, and speak about growing risks that the U.S. economy will be growing at a lower rate.

Dynamics of recession chances in USA

Source: Wall Street Journal

Dynamics and structure of U.S. economy risks

Source: Wall Street Journal

Markets are gradually calming down. The retest of the upper limit of the previous consolidation range at 1.1265-1.1485 by the EUR/USD pair results from the concerns that the ECB, following the Fed, might stick to its ultra-easy monetary policy longer than it is currently expected. According to the minutes of the Governing Council in December, the projections for the euro-area economy are getting worse.

In my opinion, the European central bank is in a more difficult situation than the U.S. one. If the Fed can afford to take a break in monetary normalization process due to a slowdown in global GDP rate, then Mario Draghi and his colleagues want but fear. On the one hand, they need a set of means to manage the future crisis, on the other hand, the euro-area is not so strong to do it. In this environment, the EUR/USD is still likely to rally towards 1.163-1.165 if the January’s high is broken through; but the pair will need new drivers next.


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Dollar is losing freshness

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