One day after St Louis Fed president James Bullard opened the door for the "patient" Fed to start cutting rates and sending yields and the dollar sliding, moments ago the Fed Chair doubled down on dovishness when in a speech delivered to the Chicago Fed, Powell confirmed the Fed's openness to cut interest rates if necessary, stating that the Fed's unconventional tools are now conventional and will "likely be needed in some form in the future" as he pledged to keep a close watch on the escalating trade war between the US and some of the world's largest economies.
Sparking a renewed dovish kneejerk reaction was Powell's flashing red headline that the Fed will "act as appropriate" to sustain the expansion, while affirming the the Fed is closely monitoring implications of trade negotiations for the US economic outlook as the "Fed does not know how or when trade issues will be resolved." Here is the key segment from his speech:
“I’d like first to say a word about recent developments involving trade negotiations and other matters. We do not know how or when these issues will be resolved. We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”
In a surprising twist, Powell said that with the economy growing, unemployment low and inflation stable "it's time to rethink long-run strategies." Powell also hinted that both QE and ZIRP, and perhaps NIRP are on deck, stating that interest rates so close to zero "has become the preeminent monetary policy challenge of our time," and admitting that "perhaps it is time to retire the term 'unconventional' when referring to tools that were used in the crisis. We know that tools like these are likely to be needed in some form in the future." And the clearest hint that the Fed is preparing for a deflationary tide was Powell's preview that "the next time policy rates hit the lower bound - and there will be a next time - it will not be a surprise."
But wait, there's more, because in the clearest indication that the Fed is panicking about losing control over inflation expectations, Powell said that "my FOMC colleagues and I must—and do—take seriously the risk that inflation shortfalls that persist even in a robust economy could precipitate a difficult-to-arrest downward drift in inflation expectations.”
Translation: not only is the Fed ready to cut rates, but it may take "unconventional" tools during the next recession, i.e., NIRP and even more QE.
Powell also acknowledged that the Fed has now lost control of the dot plot, saying: "Unfortunately, at times the dot plot has distracted attention from the more important topic of how the FOMC will react to unexpected economic developments. In times of high uncertainty, the median dot might best be thought of as the least unlikely outcome."
So perhaps it is time to call it the anti-dot plot?
Referring to “trade negotiations and other matters,” the Fed Chair said that “we do not know how or when these issues will be resolved."
As Bloomberg notes, Powell’s speech was dedicated to the Fed’s yearlong goal of reviewing its monetary policy strategies, tools and communication practices. “With the economy growing, unemployment low, and inflation low and stable, this is the right time to engage the public broadly on these topics."
Curiously, just hours before Powell's speech, Chicago Fed President Charles Evans brushed aside the idea the Fed needed to cut rates in response to market pressure, in a surprisingly hawkish speech.
Powell, however instantly reversed this market sentiment, and his dovish turn sent both the dollar...
... and 10Y yields sharply lower...
... before both rebounded to pre-comment levels in a kneejerk reaction which we doubt will be sustained.