The full text of Lael Brainard's speech is out and, contrary to Friday's expectations, she appears quite dovish:
- *BRAINARD URGES CONTINUED `PRUDENCE' IN REMOVING ACCOMMODATION
- BRAINARD: CASE TO TIGHTEN POL PREEMPTIVELY 'LESS COMPELLING'
- *BRAINARD SAYS WEAK DEMAND FROM ABROAD TO WEIGH ON U.S. OUTLOOK
- *BRAINARD SAYS JAPAN IS GREATLY CHALLENGED, EUROPEAN GROWTH SLOW
- *FED'S BRAINARD: MORE CONCERNED ABOUT UNDERSHOOTING INFLATION
- *BRAINARD: POLICY SHOULD TILT TOWARD GUARDING AGAINST DOWNSIDE
- *BRAINARD SAYS CASE TO TIGHTEN PREEMPTIVELY IS `LESS COMPELLING'
- *BRAINARD: STABILIZATION OF OIL, USD, SHOULD LIFT INFLATION
- *BRAINARD: ECONOMY HAS SEEN WELCOME PROGRESS ON SOME FRONTS
- *BRAINARD SAYS HAS SEEN SIGNS OF PROGRESS ON FED INFLATION GOAL
- *BRAINARD SAYS LOW NEUTRAL INTEREST RATES LIKELY TO PERSIST
Key Excerpts from a speech which among other things, blames China again for the Fed's inability to hike rates:
The apparent flatness of the Phillips curve together with evidence that inflation expectations may have softened on the downside and the persistent undershooting of inflation relative to our target should be important considerations in our policy deliberations. In particular, to the extent that the effect on inflation of further gradual tightening in labor market conditions is likely to be moderate and gradual, the case to tighten policy preemptively is less compelling.
From a risk-management perspective, therefore, the asymmetry in the conventional policy toolkit would lead me to expect policy to be tilted somewhat in favor of guarding against downside risks relative to preemptively raising rates to guard against upside risks.
This asymmetry in risk management in today's new normal 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. I look forward to assessing the evolution of the data in the months ahead for signs of further progress toward our goals, bearing in mind these considerations.
Most importantly, China is undergoing a challenging transition from a growth model based on investment, exports, and debt-fueled state-owned enterprises to one driven by consumption, services, and dynamic private businesses. Because of the adjustment costs along this transition path and demographic trends, Chinese growth will likely continue to slow. Given that China has experienced very high growth in corporate debt, this downshift could pose risks. Importantly, Chinese authorities have made some progress on clarifying their policy stance, and capital outflows have slowed in recent months. Nonetheless, considerable uncertainty remains, and further volatility cannot be ruled out. The importance of Chinese growth and stability to many emerging market economies and to global markets more broadly implies that these risks have global implications.
The kneejerk reaction was 'buy everything' but that quickly faded...
As September rate hike odds tumbled from arund 20% to 11%...
* * *
As we detailed earlier, this is today's main event: in a few moments, Fed board governor Lael Brainard will speak with Michael Moskow, vice chair on the global economy at The Chicago Council on Global Affairs. Many have speculated that in this final speech ahead of the Fed's blackout period going into the Sept 22 FOMC meeting, may reveal (as explained below) a more hawkish bias to the Fed, which is why the traditionally dovish Brainard was chosen to speak. Or it may not, and lead to a surge in the S&P.
The event is prefaced by the Chicago Council as follows:
In the last decade, US interest rates were increased once – and still hover near zero. Recent statements by senior Federal Reserve officials suggest that the case for raising rates has strengthened, yet economic indicators still paint a complex picture. In advance of the next rate-setting meeting this September, what is the economic outlook for the United States, and what are the monetary policy implications?
In other words, another speech largely full of fluff, but the real question is whether Brainard will also hint at the Fed's "rate hike" intentions next week, or alternatively, unleash a "Violent Rally In Risk", as we previewed earlier when she rejects speculation about imminent tightening, something RBC's Charlie McElligott believes is far more likely as the market's drop has already effectively pushed the Fed into a "none and done" mode, even if by doing so it may have reflexively put the rate hike case once again back on.
The answer will be revealed at 1:15pm Eastern at the following live webcast.
* * *
Among the factors roiling the market last Friday, was the surprising addition of Fed governor Lael Brainard to the list of speaker in Chicago today, making hers the last scheduled appearance before U.S. central bankers go into their traditional pre-meeting quiet period ahead of a Sept. 20-21 FOMC meeting. The theory that quickly spread across the market is that Brainard, one of the Fed's most dovish members not to mention a four-time donor of Hillary Clinton, would send a signal that tightening is coming, a flip-flop that would be sure to move markets, leading to a corresponding frontrunning of said flipflop. Others, however, saw the timing of her speech as consistent with her record because she spoke close to both the March and June meetings, urging a patient stance both times.
While Brainard's speech may end up being a lot of hot air, the market is certainly eagerly expecting her comments and planning how to trade it. As DB's Jim Reid noted overnight, "it’s worth keeping a close eye on Fed Governor Brainard’s comments this evening at 6.15pm BST/1.15pm EST. As a reminder this scheduled event was only added very recently and there’s some suggestion that it could be used as an opportunity for the Fed to raise market expectations and give the FOMC some more wiggle room at the September meeting, given Brainard’s position as one of the most dovish committee members. "
However, the best preview of Brainard's speech comes from Bloomberg's Richard Breslow who says that "The Speech Is Big, But Don’t Over Dramatize It." Here is his full note:
The linguistic flourishes being used to describe the upcoming speech by Fed Governor Lael Brainard are melodramatic indeed. You’re expected to believe that the global economy, the Fed’s “remaining” credibility and billions of dollars of hard-earned wealth effect hang in the balance. Truth is, if they don’t do something now, they’re likely to push hard on the notion of December. Which is worth keeping in mind as the market races one way or the other as she delivers her verdict.
Futures price about 30% probability of a move. It’s reasonable to say she’s probably worth at least 25% in either direction. But it also means December will reprice immediately as well.
They’re unlikely to abandon low and slow, just because they sensed an opportunity to move a teeny bit away from crisis pricing. Nor give up on the realization that “extraordinary” shouldn’t always have positive connotations. Just think how the world might be different if they had called it “Titanic monetary policy.”
It won’t happen, but it may be worth listening to the entire presentation, or at least doing what you have to do and going back and reading it. And I certainly wouldn’t extrapolate the message, whatever it is, infinitely into the future.
The rapid repricing last week has done some, but not a lot, of damage to technicals. Gold and the Bloomberg dollar index remain not only in very familiar territory, but the very middle of their recent ranges.
Bonds, globally, remain the most interesting asset. Very important to watch. But sovereign yields haven’t risen simply because of this speech. Bund yields have poked back above zero for the first time since July. The 30-year JGB remains above 50bps and 10-year USTs are breaking through the first lines of support. This is healthy.
Equities tried to send a warning shot, but it’s hard to get too excited. S&P 500 saw these levels in July. For all the bulls, it’s a buying zone, but returning to last week’s range is about the extent of what you should expect. The fact that no one wants to buy until the Fed tells them the put is still in place should tell you something.
West Texas oil is $40-$50 until the cows come home. Forget that production freeze behind the curtain.
Is today big? Yes. Will it change your world? Few things do, unless you don’t follow the signs.
Translation: the market may have sold off enough for the Fed to have already changed its mind about hiking rates in September... if that's what it had intended to do in the first place.