- Fischer prefers effective fiscal and regulatory policies for fine-tuning economy
- Fed appears to be reassessing its views on its own policy tools
- BoJ's Kuroda indicates that Japanese rates could go more deeply negative
Fischer's speech suggests a rate hike sooner rather than later. Pic: IMF
By John J Hardy
Influential Fed vice chairman Stanley Fischer was out speaking
over the weekend and very clearly expressing that he sees both inflation and especially employment in the Fed’s target range, while also waxing optimistic on the potential trajectory of the US economy from here. Perhaps more interesting was that a good portion of his speech was dedicated to concerns over the longer-term decline in productivity growth, a hot-button issue for all policymakers and every major economy.
(Unfortunately, we don’t see Fischer admitting that the Fed’s encouragement of further growth in excessive debt levels and misallocated investment due to ZIRP are key causes of weak productivity growth, but that’s another story.)
In his concluding section, Fischer argues that monetary policy is not the right tool to address the productivity problem, and that fiscal and structural measures are preferable:
“In particular, monetary policy is not well equipped to address long-term issues like the slowdown in productivity growth. Rather, the key to boosting productivity growth, and the long-run potential of the economy, is more likely to be found in effective fiscal and regulatory policies.
While there is disagreement about what the most effective policies would be, some combination of improved public infrastructure, better education, more encouragement for private investment, and more-effective regulation all likely have a role to play in promoting faster growth of productivity and living standards – and also in reducing the probability that the economy and particularly the central bank will in the future have to contend more than is necessary with the zero lower bound.”
So while the headlines trumpet the implications for Fed rate hikes, the bigger issue here is another reminder from a key Fed official pointing to a shift in the Fed’s attitude towards its own post-global financial crisis monetary policy toolbox.
Increasingly, the Fed appears to be signaling that it wants to pass the policy baton on to the fiscal authority and financial markets may be less able to count on the Fed put than it has in the past for the kind of USD-negative and asset market pumping measures the Fed has provided in the past.
Bank of Japan governor Kuroda was interviewed this weekend and signaled more action at the September 21 BoJ meeting, in particular arguing that rates could go more negative while saying that helicopter money remains beyond the pale as a policy option. As well, the stakes of the September BoJ meeting have been raise further as the result of the bank’s comprehensive policy review will be published on the day of the meeting.
USDJPY is once again trying to rally after the hawkish Fed developments and dovish BoJ developments over the weekend. More convincing for the bulls would be a rise through 101.25/50 area and an attack on the Ichimoku cloud, which could point to a test of the range highs as the MACD turns higher, or at least the top of the cloud around 105.00 ahead of the September 21 BoJ meeting.
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Source: Saxo Bank
The G-10 rundown
USD – USD direction awaits Friday’s Jackson Hole speech from Fed chair Janet Yellen, with more interest in long-range observations on policy direction rather than the latest tilt on rate hike odds/timing.
EUR – Eurozone flash PMIs tomorrow is the key economic event risk of the week. EURUSD traders looking at 1.1200/50 zone for whether last week’s rally is something to build on or to fade.
JPY – a nervous wait here, not only for USDJPY around Yellen’s speech at the end of the week, but of course due to the September 21 BoJ/FOMC meetings. If USD is unable to sustain a rally post-Jackson Hole, risk to 95.00 in USDJPY.
GBP – Looking lower in GBPUSD again after Friday’s reversal, though we’re still coiling in a range and need to see momentum build again. 1.3180 is a key technical point established by last week’s action if the bears get squeezed, however.
CHF – nothing new here in EURCHF terms, though the snapback in USDCHF gives bulls hope that the range to 0.9500 will survive once again – better confirmation there if we retake 0.9700/50.
AUD – 0.7600 area looks pivotal in AUDUSD, but we need to get to the other side of this Friday’s Yellen speech for firmer traction on technical. We’re bearish AUD, but without technical conviction just yet.
CAD – weak CPI data on Friday and oil coming off its short squeeze – we’ve got perhaps the key new range low in place in USDCAD here if the USD is going to rally and extend post the Yellen speech on Friday, but a solid re-taking of 1.3000 would be a bigger help.
NZD – Reserve Bank of New Zealand making noises about gathering more long-term inflation expectation data as a key input for policy. Not sure what bearing this will have in the near term, but in the short- to medium term, the key for NZDUSD is what direction we break out of the 0.7000-0.7300+ range. RBNZ to publish a governor Wheeler speech tomorrow morning – high potential for a large reaction here as the speech is titled “Monetary policy challenges in turbulent times”.
SEK – finally some interesting data this week, with August confidence surveys and unemployment rate and household lending up on Thursday. Look out below for overleveraged Swedish economy when that household lending survey turns (currently at a blistering 7.7% year-on-year clip as of June).
NOK – EURNOK bears need to get upper hand this week if the recent slide is to have much meaning – unfortunately for the NOK bulls, the recent aggressive rally in NOK failed to provide any further support for NOK below 9.20 in EURNOK.
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank