USD/JPY retreats from 147.95 with Fed’s independence in question
- The US Dollar pulls back from weekly highs at 147.95 as concerns about the Fed's independence grow.
- Trump's attempts to bend the Fed's consensus to the dovish side are starting to weigh on the US Dollar.
- The Yen is drawing some support from BoJ Ueda's comments, citing concerns about wage growth.
The US Dollar pares gains after a three-day rally against the Japanese Yen, as investors ponder the consequences of US President Trump’s attempts to gain control of the Federal Reserve, and Governor Cook’s decision to sue the president.
Trump’s unprecedented decision to oust Cook is just the latest episode in a harsh campaign by the US President to pressure the Federal Reserve to accelerate its monetary easing cycle.
Growing doubts about Fed’s independence are punishing the USD
With Cook’s replacement, following the nomination of a loyal dove after Kugler's resignation, Trump is seeking to turn the bank’s consensus to the dovish side, in a maneuver that compromises the bank’s credibility and its ability to set an appropriate monetary policy.
Beyond that, the heightened market expectations that the US central bank will finally cut interest rates in September are increasing bearish pressure on the US Dollar.
The Yen, on the other hand, is drawing some support from recent comments by BoJ Governour, Kazuho Ueda, who warned about the inflationary impact of rising wages, boosting market hopes of a further interest rate hike in the coming months.
The market is looking at the advanced Tokyo Consumer Sentiment Index data due on Thursday to confirm Ueda’s concern about inflation. A strong CPI reading would add pressure on the bank to tighten its monetary policy further and might provide additional support to the Yen.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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