Powell's Impossible Balancing Act

Jerome Powell doesn't have it easy. As chairman of the US central bank, he must strike a balance between maintaining economic growth and preventing inflation from rising too fast. In the meantime, he is also in danger of losing his job.

In some cases, just good isn't really good enough. Just think of Ronald Koeman, who was appointed coach of FC Barcelona in August 2020. A few days earlier, the team had painfully lost 8-2 to Bayern Munich, while star Lionel Messi hinted that he would like to leave. In the end, Koeman managed to get the team on track. Barcelona participated in the Spanish championship until the last days. Still, the new chairman seemed to be pushing Joan Laporta to replace Koeman in the run-up to the new season. There is a good chance that US Central Bank (Fed) Chairman Jerome Powell feels the same way as Koeman.

Act fast, better opportunities
It is partly due to Powell's swift actions that the US economy is recovering at lightning speed from the corona lockdown. He cut interest rates to just above zero and made $2.300 billion available to banks to lend to US households. Despite those good moves, it's not yet a foregone conclusion whether Powell will get the green light from US President Joe Biden to start his second term in February 2022. The speech he gave to the US Congress last Tuesday may have boosted his chances again just a little bit.

Steering by numbers instead of fear
Powell's main message is that he should not be swayed by fear of rising inflation. Instead, he only wants to take action when figures actually show that inflation is above the target of 2%. That probably sounds like music to Biden's ears. Low interest rates make it a lot easier to finance large expenses such as the corona support package and a large infrastructure plan. In the short term, Powell's speech has at least briefly put an end to the dollar's rapid rise. Since the end of May, the currency had appreciated by more than 2% against the euro.

Dots or words?
The dollar's appreciation was fueled in part by the so-called dot plot. That chart shows the Fed's expectations for future interest rates. In the latest interim position, the chart showed that the interest rate expectation in 2023 is suddenly half a percentage point higher. Should currency traders now value the dot thud or Powell's words? It is difficult for the Fed chairman to suddenly change his tone without losing his credibility. And it will be weeks before the report of the recent Fed meeting comes out, with the next summit scheduled for late July. So for now, the currency world is in as much uncertainty about the dollar's direction as Powell is about his orbit.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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