There's such a thing as over-communicating
I lost count of the number of times Powell tried to walk back on his comments in his press conference yesterday and at one point when he started talking about rate hikes again, you knew it was failure in communication in many aspects.
There's no doubt that the reporter questions were designed to flesh out something more juicy from Powell but in his best efforts to not take the bait, he gave out a frantic message by not wanting to dive into the "insurance cut" vs. easing cycle debate.
That said, he did leave clues and some things for what we should expect from the Fed moving forward and I'll try to keep my thoughts short and concise:
1. The Fed isn't looking at the start of an easing cycle
Powell made this clear when he flip-flopped on remarks about a "one and done" when he claimed that they aren't intending to aggressively ease but at the same time the rate cut yesterday may not necessarily be a "one and done" matter as well.
At this stage, it is merely to "insure" but any future decisions will be aimed to "sustain the economic expansion". In short, the Fed will take a more reactive approach rather than a proactive one moving forward.
2. The 25 bps rate cut is merely an "adjustment"
He made this more clear in the early part of his speech when he spoke about the move being a "mid-cycle adjustment" and said that there was "an insurance aspect" to cutting rates yesterday. That tells you all you need to know about his view on the matter.
Although he tried to walk back on it a little as mentioned above, it couldn't have been clearer and with two Fed members even dissenting, it's hard to see the appeal for more "adjustments" unless economic data deteriorates significantly in the coming months.
3. Data, data, data...
Any future rate cut(s) will depend on how economic data evolves. So, the Fed is essentially back to being data dependent and will only act when the data suggests that it should.
Going by what we're seeing so far, I reckon there's not much need for another cut but we'll see how things go in the coming weeks ahead of the September meeting.
Either way, the door for a series of rate cuts to follow after this one isn't wide open by any means but at least there's a small gap there.
So, what does this all mean for the dollar?
In short, unless economic developments suggest that the Fed should be cutting rates more (which in my view, they still don't) then there is little scope for the dollar to weaken considerably if you consider what is happening elsewhere:
Europe: Economic growth slowing, ECB to ease more aggressively in September
UK: Economy flirting with a recession, Brexit worries continue to mount
Australia: Inflation still missing target, economic conditions slowing, RBA set to cut in Q4
New Zealand: Economic worries continue, RBNZ rate cut cycle set to continue
The loonie is one of the exceptions as the Canadian economy is still holding up well while the yen and franc are traditional haven currencies so I would look past those when assessing the dollar's position in light of a global economic slowdown.
But when you consider what is happening elsewhere above, the dollar remains the best of a bad bunch still and with the Fed keeping yields propped up and the US economy set to outperform its peers, it's tough to argue for the dollar to weaken as long as the market focus continues to rest on these issues.
