Fed's Powell Announces Policy Framework Tweaks for Changed Economic Landscape

Forex

Economic

Summary:

Nodding toward significant changes in the economic landscape over the last five years, Federal Reserve Chair Jerome Powell on Friday announced an updated operating framework for the U.S. central bank that reflects the return of higher inflation pressures and reduced prospect of near zero short-term interest rates.

Announcing the changes in a speech to be delivered to the Jackson Hole economic symposium in Wyoming, Powell said "there is a great deal of continuity with past statements" in the new framework.

"We continue to believe that monetary policy must be forward-looking and consider the lags in its effects on the economy" and that the Fed must balance risks to both its job and inflation mandates when setting monetary policy, Powell said. He added that setting numerical goals for things like the ideal level of employment is "unwise."

The new operating edict moves away from what had been an omnipresent challenge of monetary policy having to operate at very low interest rates due to what had been a period of very low inflation relative to the Fed's 2% target, the landscape that informed its 2020 policy review.

Powell said in the new framework "we removed language" about the low-rate environment and "we returned to a framework of flexible inflation targeting and eliminated the 'makeup' strategy" featured in the 2020 framework, the last time the Fed updated its overall operating principles.

"Our revised statement emphasizes our commitment to act forcefully to ensure that longer-term inflation expectations remain well-anchored, to the benefit of both sides of our dual mandate," Powell added.

The review of the central bank's operating principles was widely expected. The minutes from the central bank's July 29-30 policy meeting, released on Wednesday, had noted the overhaul "would be designed to be robust across a wide range of economic conditions."

That was a nod to the fact that the last iteration was quickly overrun by the events of the COVID-19 pandemic. The agenda advanced then said the Fed would allow inflation to overshoot the 2% target to make up for periods when the central bank had fallen short of the goal.

Powell said under the new principles "we take into account the extent of departures from our goals and the potentially different time horizons over which each is projected to return to a level consistent with our dual mandate."

IMPACT OF PANDEMIC

The last framework was adopted in the context of a Fed that at that time had been contending with an extended period of very weak inflation pressures, which had in turn led to a long period of very low short-term interest rates. Low rates complicated the Fed's ability to respond to economic shocks.

Source: Yahoo Finance

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Samantha Luan

Economic

Political

The US is immediately pausing the issuance of all worker visas for commercial truck drivers, US Secretary of State Marco Rubio said on Thursday."The increasing number of foreign drivers operating large tractor-trailer trucks on US roads is endangering American lives and undercutting the livelihoods of American truckers," Rubio said in a post on X.

The administration of President Donald Trump has taken a series of steps to address concerns about foreign truck drivers who do not speak English. Trump in April signed an executive order directing enforcement of a rule requiring commercial drivers in the US to meet English-proficiency standards.

Earlier this week, Transportation Secretary Sean Duffy said the Federal Motor Carrier Safety Administration (FMCSA) has launched an investigation into a crash on a Florida highway that killed three people. The crash involved a driver who was an Indian national and did not speak English or have legal authorisation to be in the US, according to Florida and US officials.

Harjinder Singh has been charged with three counts of vehicular homicide and police said he attempted to make an illegal U-turn through an “Official Use Only” access point blocking traffic and causing the fatal crash that resulted in the deaths of three people in a minivan that struck the truck.Florida officials took custody of Singh in California to return him to the state to face charges.

A lawyer for Singh could not immediately be identified.

While the English-proficiency standard for truckers was already longstanding US law, Trump's executive order in April reversed 2016 guidance that inspectors not place commercial drivers out of service if their only violation was lack of English.Duffy has said that failing to adequately enforce driver qualification standards poses serious safety concerns and increases the likelihood of crashes.

FMCSA said in 2023 that about 16% of US truck drivers were born outside the US. Last month, Reuters reported that Mexican truck drivers in the border city of Ciudad Juarez have begun studying English in efforts to comply with the Trump order.

Source: Theedgemarkets

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Adam

Economic

In September 2019, the system creaked as the Fed had gone too far with bank reserves reduction. We’re facing a similar challenge in the coming months as the Treasury replenishes its cash buffer. We identify a range from $2.5tr to $3tr within which bank reserves can settle, likely at the upper end. And if there’s an issue, the Fed can always rebuild them

Here’s Why US Bank Reserves Today Are So Much Higher Than They Were. And Why They Are Now Falling

Before the Great Financial Crisis (GFC) bank reserves were typically around $0.2tr, as banks only held cash at the Fed for regulatory reasons – the Fed paid zero percent interest on them. The GFC prompted a number of phases of Fed bond buying – quantitative easing (QE) – which meant banks built reserves (other side of the QE trade).

To facilitate this, the Fed remunerated banks at a newly introduced rate on reserves (currently 4.4%). Fast forward to the subsequent pandemic-induced QE, and the US banking system has become structurally characterized as a large reserve volume one.

At the same time, recent years have allowed the Federal Reserve to slowly deflate the excess of liquidity, predominantly through the reverse repo facility. This facility allows market participants to post excess liquidity at the Federal Reserve. At its peak in 2022/2023, some $2.5tr of overnight liquidity routinely went back to the Fed.

Mostly as a consequence of post-pandemic quantitative tightening (QT), these balances are now running at below $50bn. More recently, it’s been given a further push lower, as the lift of the debt ceiling allowed the US Treasury to issue more bills for the purpose of rebuilding its cash buffer.

With reverse repo facility balances approaching zero, and with the US Treasury continuing to rebuild its cash buffer, the likely next phase sees this show up in reductions in bank reserves. Bank reserves are currently running at $3.3tr. They actually peaked at over $4tr in 2021 as the Fed’s QE programme saw a crescendo.

Since 2022, bank reserves have been broadly steady, albeit within a wide $0.5tr range. Why? Because up till now, most of the unwind of post-pandemic excess liquidity happened through reductions in balances going back to the Fed on the reverse repo facility.

Ahead Bank Reserves Can Lurch Lower as the Treasury Rebuilds Its Cash Buffer at the Fed

Going forward, bank reserves will be far more responsive to liquidity variations. The policy push here is the c.$20bn that continues to roll off the Fed’s balance sheet through what is now quite a tame QT-lite.

But the biggest direct liquidity push of late is coming from the US Treasury, as the build in their cash buffer has a counterpart in lower bank reserves. That Treasury cash buffer is now at $550bn. It could get to $800bn (a staging area in the past). If it did, it would mean bank reserves falling by $250bn, pulling bank reserves down towards $3tr. Should we worry about this?

The last time the Fed actively allowed bank reserves to fall was during the QE unwind (QT) that finally concluded in 2019. In September of that year, the Fed discovered that they had gone too far. Bank reserves had been halved to $1.4tr by then, and at that month end there was a severe disruption as the market struggled to deal with a dearth of liquidity, manifesting in a huge spike in repo rates.

The system basically haemorrhaged, partly driven by a relatively moderate corporate tax payment need of some $120bn. So what did the Fed do in response? They went ahead and rebuilt bank reserves through repo, and ultimately by buying T-bills. That’s the recipe; rebuild reserves if seen to be too low. The Fed has likely learnt from this experience.

The Big Question Is Whether This Can Become a Problem, and at What Level Does the System Creak (As It Did Before)

The follow-on question is what level of bank reserves are comfortable? To help answer this question we can refer back to the 2019 experience, which can at the very least identify a floor where reserves would be too low. Far from perfect, but one thing we can do is make a judgement on reserves based off them a percent of GDP.

In September 2019, that percent hit a low of 6.5%. That was forced back up towards 8% as the Fed rebuilt reserves. That type of level should be considered an absolute floor.

Calibrating this to today and projecting over the coming six month, that would equate to a bank reserves balance of some $2.5tr (at 8%). Then 9% reserves would be $2.8tr, while 10% would be $3.1trn. Simplistically, if 8% is a floor, then 9% offers some comfort to that floor, while 10% is likely very comfortable. The current level of bank reserves is $3.3tr, so we’re comfortably above the most conservative level of $3.1tr.

What if the US Treasury goes ahead of adds a further $250bn to its cash buffer? Basically, this would bring bank reserves to the conservative 10% area. We should be fine there. At the same time, QT is shaving reserves by some $20bn per month (note that the $35bn cap on MBS roll-offs is rarely hit).

That can further eat into reserves. That said, it seems to us that even then, circumstances are relatively comfortable. It may in fact also turn out that 9% is a doable level of bank reserves as percent of GDP, equating to $2.8tr of reserves.

Identifying the Range $2.5tr (tight) to $3tr (Comfortable)

The top chart is bank reserves plus the reverse repo balances

Should We Worry About Falling US Bank Reserves?_1

Bottom Line, the System Can Handle a Fall in Reserves. Worst Case, the Fed Rebuilds Them

In the end though, the Fed is likely to be super conservative here. The US is a high reserves banking system, and the Fed will not want to be seen to be leaving the market short. If there was the evolution of a shortage, the Fed would engage in a rebuild of reserves.

They could do this in a temporary fashion through the Fed’s standing repo facility (currently broadly unused), or in a more permanent fashion through buying bills. They could also do this through buying bonds, but might prefer not to, as it could be construed as QE.

By all means watch this space, as it’s important for the proper functioning of the system. But we would be of the opinion that the Fed is on the case, and will manage to avoid a repeat of September 2019.

Source: investing

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Warren Takunda

Stocks

Leading European stock markets reflected a cautiously positive sentiment on Friday as investors watched for progress on Ukraine peace talks and awaited a speech from US Federal Reserve chair Jerome Powell. He will speak on Friday at Jackson Hole, where central bankers gather for their annual meeting.

Markets also digested details of an EU-US trade truce and better-than-expected business activity data, announced on Thursday.

Despite the news that the German economy shrank more than initially estimated in the second quarter, the German DAX changed direction and made up its earlier losses, gaining around 0.1% after 11.00 CEST.

The FTSE 100, though trading in negative territory all morning, also followed suit and changed course, gaining a few points by late morning.

The Paris CAC 40 was up 0.2%, the Madrid IBEX 35 rose by 0.4%, and the European benchmark STOXX 600 increased by 0.2%.

As for the London blue chip index, the early morning slight dip appeared to be just a small correction. "The FTSE 100 saw a subdued start on Friday after achieving a record close above 9,300 yesterday,” said AJ Bell investment analyst Dan Coatsworth in his note.

Investors are focusing on the message Federal Reserve chair Jerome Powell might deliver at the Jackson Hole summit in Wyoming.

“Investors had been expecting a rate cut from the Fed next month so if Powell were to say anything suggesting rates might be kept on hold, it could see stocks come under greater pressure," said Coatsworth. He added that robust PMI data from the US on Thursday pointed to a strong economy, potentially reducing the chances of the Fed lowering borrowing costs.

A cut in interest rates would be the first of the year and it would give asset prices and the economy a boost — but it could also risk worsening inflation.

The Fed has been hesitant to cut interest rates this year out of fear that President Donald Trump's tariffs could push inflation higher, but a surprisingly weak report on employment growth earlier this month suddenly shifted focus towards the job market. Trump, meanwhile, has forcefully pushed for cuts to interest rates, directing fierce criticism towards Powell.

US markets closed in a gloomy mood

On Wall Street on Thursday, the S&P 500 slipped 0.4% to 6,370.17, continuing a gradual decline since a record on 14 August. The Dow Jones Industrial Average dropped 0.3% to 44,875.50, and the Nasdaq composite fell 0.3% to 21,100.31.

In other dealings early on Friday, the US dollar rose to 148.48 Japanese yen, from 148.37 yen. The euro slipped to $1.1590 from $1.1606.

Meanwhile, oil prices fell by midday in Europe; the US benchmark crude lost 0.2% and was traded at $63.38 per barrel. Brent crude, the international standard, also was down by 0.2% at $67.52 per barrel.

Oil prices moved higher yesterday, "as the initial enthusiasm over progress towards a ceasefire between Russia and Ukraine continues to fade", said ING in a note. Expectations of increased global uncertainty are driven by the difficulties of setting up a Putin-Zelensky summit and securing potential security guarantees for Ukraine.

Asian markets were also mixed on Friday

Asian shares were also mixed on Friday. In Tokyo, the Nikkei 225 rose less than 0.1% to 42,633.29 after Japan's core inflation rate slowed to 3.1% in July, from 3.3% in June.

ING Economics said in a note that price pressures were broadly in line with market consensus. Inflation staying above 3% raises the likelihood of a rate hike as soon as October, it said.

In Chinese markets, Hong Kong's Hang Seng index rose 0.9% to 25,339.14. The Shanghai composite index climbed 1.5% to 3,825.76.

South Korea's Kospi added 0.9% to 3,168.73. Australia's S&P/ASX 200 fell 0.6% to 8,967.40 as traders sold to lock in gains after the benchmark surged to record highs in recent trading sessions.

Source: Euronews

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Michelle

Economic

The U.S. and European Union granted businesses some desperately sought after clarity as they shared fresh details on their trade agreement on Thursday, but questions remain about whether the deal can really be trusted.

Thursday's update broadly echoed the framework announced by the U.S. and EU in July, which called for 15% tariffs as well as pledges for Brussels to amp up spending and investment in the U.S. New details include a cap of 15% tariffs on pharmaceuticals, lumber and semiconductors. Autos will face the same rate, but only after the EU makes legislation changes to reduce its industrial duties.

However, EU Trade Commissioner Maros Sefcovic on Thursday suggested the framework was just the beginning, leaving the door open for future changes to the deal.

Missing details

Despite providing some much-needed clarity, there are still various smaller, yet crucial, aspects missing from the current framework.

A muted market reaction from pharmaceuticals on Thursday highlighted investor skepticism and there was no mention of the wine and spirits sector in the deal.

"A lot of the details remain to be worked out," Penny Naas, who leads on the German Marshall Fund's allied strategic competitiveness work, told CNBC, pointing to for example so-called 'rules of origin.'

"These rules determine where value is most added to a product that contains multiple parts from multiple countries, and when it can be labeled 'European' or 'American,'" she explained. Naas noted that these rules come into play when it comes to for example transshipments — a process in which goods might originate from one country, but are then sent to another for final shipment to the U.S.

Carsten Brzeski, ING's global head of macro, meanwhile pointed out uncertainties "stemming from formalities and procedures at customs," which he says are particularly impacting small and medium-sized enterprises.

Some companies are already facing issues in this regard, with firms having to "recruit tariff specialists in order to clarify the new customs requirements," he said.

Trump's flip-flopping

Another concern is U.S. President Donald Trump's history of fact-paced changes of heart and policy shifts, Antonio Fatás, professor of economics at the European Institute of Business Administration (INSEAD), told CNBC.

The president for example doubled steep steel tariffs overnight, and later quietly expanded their scope.

Elsewhere, Switzerland was victim to the president's erratic decision making, with the country reportedly having been extremely close to a deal, which was then however pulled by Trump as he slapped 39% duties on Swiss exports to the U.S. almost overnight.

"The real issue for business is how to define a long-term strategy with a country that is no longer a reliable partner," Fatás said. "What used to be the most reliable partner for Europe has now become one of the most volatile, if not the worst, when it comes to economic policies," he added.

The German Marshall Fund's Naas also flagged this as a risk for businesses.

"This deal does not include any enforcement provisions, nor will it be codified by Congress, which means it could change at the direction of the U.S. President," she said.

Naas pointed to Section 232 tariffs as an example, with Trump having changed tariff rates on some products "at a moment's notice, and the Administration has expanded the scope to cover other products without warning."

To trust or not to trust?

Businesses are therefore left with a key question: to trust or not to trust the deal.

While Thursday's statement adds some clarity, the deal "remains fragile and could quickly dissolve," ING's Brzeski said in a note after the announcement. "The agreement contains numerous elements that could spark future tensions and escalation. Implementation, monitoring and enforcement of many of the intentions is not always clear," he added.

Naas echoed the calls for caution. While the U.S.-EU agreement appears "more likely to be stable" than some of Trump's other tariff policies like sectoral duties, it "will require the EU to remain on "good behavior" or else risk a sudden change," she said.

In addition to the uncertainties about the stability of the U.S.-EU deal, businesses are also contending with questions regarding various global shifts in the market, according to Gregor Hirt, multi-asset chief investment officer at Allianz Global Investors.

He told CNBC businesses are facing several key questions: "Is the US heading toward a recession or even worse, stagflation, and how resilient will companies' margin be in this kind of environment, especially considering the high market valuation in the US? Moreover, what further tools do policymakers have to counter a potential downturn, for example in terms of deregulation or specific sector 'incentives'?"

"And, finally, how will the shift away from global trade liberalisation and institutionalize framework affect long-term investment and supply chain strategies?" Hirt said, adding that these tariff-related issues are also key for companies ability to plan in the current environment.

Source: CNBC

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Adam

Commodity

Market Overview

WTI crude oil held above $63.5 per barrel on Friday, pacing for its first weekly gain in three weeks amid strong U.S. demand signals and broader geopolitical tensions. U.S. stockpiles posted their sharpest nationwide draw since mid-June, though a build at Cushing hinted at weaker underlying demand.

Refinery runs and robust exports contributed to the decline. Meanwhile, natural gas prices remained pressured as markets assessed supply risks alongside global uncertainty.

Traders also awaited Federal Reserve Chair Powell’s Jackson Hole remarks for policy guidance, which could further sway energy demand and market direction.

Natural Gas Price Forecast

Natural Gas (NG) Price Chart

Natural gas futures ($NG) are trading at $2.78, slipping under trendline resistance after failing to sustain above $2.80. The 50-EMA ($2.84) and 100-EMA ($2.93) continue to slope downward, reinforcing bearish momentum. Support sits at $2.72 and $2.67, with a break lower exposing $2.61.

RSI at 46 signals weak momentum, staying below neutral, while repeated lower highs highlight ongoing downside pressure. Bulls need a decisive close above $2.88 to target $2.95 and $3.03, but until then, the bias remains cautious to bearish.

For now, natural gas is stuck in a downtrend, with sellers maintaining control unless price reclaims key moving averages and breaks the descending structure.

WTI Oil Price Forecast

WTI Price Chart

WTI crude oil ($USOIL) is testing resistance at $64.14 after rebounding from support at $62.63. The price has broken out of its descending channel, suggesting buyers are regaining control. Both the 50-EMA ($63.20) and 100-EMA ($64.03) are acting as near-term pivots, with the market attempting to hold above them.

RSI at 60 signals moderate bullish momentum, though not yet overbought. A clear move above $64.14 could open the path toward $65.12 and $66.46, while failure to hold $62.63 risks a pullback to $61.60.

For now, crude oil is in a cautious recovery phase, with traders watching if bulls can sustain pressure above the EMAs for further upside.

Brent Oil Price Forecast

Brent Price Chart

Brent crude ($UKOIL) is trading at $67.78, testing resistance at $68.21 after a steady climb supported by a rising trendline. The 50-EMA ($66.81) and 100-EMA ($67.26) are converging, reinforcing short-term support at $67.11. A breakout above $68.21 could open the path toward $69.14 and the psychological $70.00 mark.

RSI at 68 suggests strong bullish momentum but nearing overbought conditions, hinting at possible pullbacks before further gains. If price fails to sustain above $67.11, downside levels lie at $66.17 and $64.61.

For now, Brent remains in a recovery phase, with buyers in control as long as price holds above the rising trendline and key EMA levels.

Source: fxempire

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Warren Takunda

Central Bank

Markets headed into this week thinking the Bank of England could still sneak in another interest rate cut before the year is out, even if the August 07 policy meeting caused reason to be more cautious.

However, this week's above-consensus inflation print appears to have convinced the market that November is now off, with the odds of such a cut now less than 50/50.

However, some economists have looked at the data in detail and calibrated it against the Bank of England's guidance, and reckon a cut is still likely in November.

Morgan Stanley says the Bank of England will look through the July spike in prices, noting that strong air fares helped the surprise above-consensus outcome of 3.8% year-on-year in headline CPI.

Indeed, the outcome is still in line with the Bank's August forecasts. Even strong food price inflation - 4.9% y/y - was in line with expectations. Services CPI, which the Bank pays close attention to rose to 5.0% from 4.7% y/y.

"To us, the marginal news today is that the June inflexion in underlying services inflation was halted. For the BoE, we think, there is not much in here to change existing priors. We look for the next cut in November," says Bruna Skarica, an economist at Morgan Stanley.

Bank of England to Cut in November Say These Economists_1

Above: Market-implied expectations show investors see less cuts ahead.

Oxford Economics is also not willing to shift its stance on the UK outlook based on Wednesday's inflation figures, saying the above-consensus reading was the result of seasonal factors that should soon fade.

Oxford Economics forecasts inflation to average 3.5% this year and 2.8% in 2026. "There was little in the way of genuine news that shifted the monetary policy debate in either a more hawkish or dovish direction," says Andrew Goodwin, Chief UK Economist at Oxford Economics.

"We continue to think that several more Bank Rate cuts are likely over the next 18 months. However, there's now considerable uncertainty around the timing of those moves, and a scenario in which the MPC slowly feels its way to a neutral level over a long time horizon is becoming more compelling," adds Goodwin.

Economists at UniCredit are particularly 'dovish' on the outlook for UK interest rates, still expecting two rates cuts over the rest of this year and 75bp of cuts next year, more than financial markets expect.

Bank of England to Cut in November Say These Economists_2

Above: UK inflation is trending higher, whereas it's closing in on target in other countries.

Daniel Vernazza, Chief International Economist at UniCredit in London, acknowledges that the 2025 cuts might be skipped, but this is merely a delay and not a reduction in the total to come.

From a financial markets standpoint, this is an important call, as it implies cuts will be backloaded, hinting at notable GBP downside to come.

"We see the bank rate ending next year at 2.75%, which we see as broadly neutral. At the time of writing, financial markets are pricing only a 70% probability of 25bp cut in the remainder of this year, and only 40bp of cuts by the end of next year, to 3.6%," says Vernazza.

HSBC economists expect the Bank to cut rates to 3.0% by Q3 2026, implying four more cuts spread over that period.

According to HSBC's FX Strategist, Nick Andrews, this should weaken GBP versus the EUR. "Given the impact of government policies on growth and inflation over the last year, we also think the Autumn Budget poses a risk to GBP over the coming months."

However, not all economists are convinced and are inclined to err on the side of the market in expecting limited scope for further rate cuts, based on the observation that the economy isn't exactly crying out for support.

"We still expect the MPC to remain on hold for the rest of 2025, which is slightly tighter policy than the current market pricing of 0.5 cuts by December," says Robert Wood, Chief UK Economist at Pantheon Macroeconomics.

"Major data in the UK have increasingly outperformed over the course of the year," he explains.