Federal Reserve Chairman Jerome Powell will deliver a speech on the Economic Outlook and Monetary Policy at the National Association for Business Economics (NABE) Annual Meeting in Philadelphia on Tuesday. With the US government shutdown delaying important data reports, Powell's comments could impact the value of the US Dollar (USD) in the short term.
Despite recent comments from Fed officials, the CME FedWatch tool shows the market is now fully pricing in a 25 basis point (bps) rate cut in October and there is a near 90% chance of another 25 bps cut in December.
Fed Governor Michael Barr said he was skeptical that the Fed could ignore tariff-induced inflation and said there were significant risks to the inflation target. He also said several factors could mitigate those risks. Similarly, St. Louis Fed President Alberto Musalem said it would be difficult for the Fed to respond to short-term fluctuations in the labor market if inflation expectations were not kept in check.
On a more dovish note, San Francisco Fed President Mary Daly noted that inflation has fallen more than feared and said labor market weakness looks worrisome if risks are not managed. Moreover, Philadelphia Fed President Anna Paulson, in her first public remarks, said she does not expect tariffs to cause sustained inflation and added that she sees labor market risks rising.
If Powell suggests further easing will be needed to counter the worsening labor market, the dollar could struggle to find demand. However, market positioning suggests the greenback has little room to fall even if a December rate cut is fully priced in.
On the other hand, the USD could continue to outperform its rivals if Powell adopts a cautious tone on successive rate cuts, citing uncertainty due to the lack of key inflation and employment data, as well as the possibility of a re-escalation of the US-China trade conflict .
