Morning Commentary: Fed Speak - Words Matter!

Foreign Exchange - Morning Commentary

Fedspeak - Words Matter!

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Former Fed Vice Chairman Alan Blinder coined the term “Fedspeak” to refer to a “turgid dialect of English” primarily used by Federal Reserve Chairman to make wordy, vague and ambitious statements that were intended to obfuscate. It is most commonly associated with former Fed Chairman Alan Greenspan. In today’s world, Fedspeak means to speak in plain English with clear communication as to what the Fed’s future intentions might be.
 
In a quiet and lackluster market yesterday, NY Fed President John William’s remarks set the markets off. He said that central banks should move quickly when they see signs of trouble, and these comments were interpreted to upcoming policy actions by the Fed. Interest rates dropped quickly and the U.S. dollar weakened. Later, a NY Fed spokeswoman took the unusual step of being forced to “clarify” his comments explaining that his prepared remarks were an “academic speech on 20 years of research” and not a short term indicator of future Fed action.
 
These types of mistakes should never happen. Leaders who have key responsibilities should know better that words matter.  Conducting monetary policy requires flying at 40,000 feet and not setting the markets off in a tizzy or causing additional volatility during these uncertain times.  For today, U.S. interest rates have retraced their losses from yesterday and the U.S. dollar (DXY) has regained almost all of its losses.
 
Regarding the upcoming FOMC meeting on July 31, markets remain nearly 100% committed to a Fed rate cut, following nine Fed rate increases of 25 bps going back to December 2015.  Many key institutions are now calling for a 50 bp cut. To me, a 50 bp rate cut would imply that a policy error was made back in Q4 so there is a need to reverse that mistake. With so much uncertainty in the markets regarding Brexit and trade negotiations etc., I sure hope the Fed gets this right regarding monetary policy. We cannot afford any more monetary policy mistakes at this time.
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