NEW YORK, August 25 (NikkeiAsia) - The yen slid against the dollar on Friday after Federal Reserve Chair Jerome Powell warned that the central bank was prepared to hike interest rates further if inflation remains too high in a highly anticipated address.
“Although inflation has moved down from its peak, a welcome development, it remains too high. We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective,” Powell said in the keynote address at the annual Jackson Hole Economic Symposium hosted by the Kansas City Federal Reserve Bank.
The yen fell after Powell’s address, reaching 146.6 per dollar after trading at 145.8 earlier in the day. At the time of publication, the yen was trading at 146.3 per dollar, a 0.32% depreciation on the day.
Bret Donnelly, president of foreign exchange consultancy Spectra Markets, said the dollar was cresting against the yen at the moment.
“But if I’m right, it’s probably more about U.S. yields than BOJ policy,” he said. U.S. Treasury yields rose immediately — including a 15-year high for two-year Treasurys — following Powell’s address.
Juan Perez, director of trading for Monex USA, said, “The Japanese economy is solid and we believe the yen will eventually find serious gains.”
But as long as the Fed shows no signs of accommodative monetary policy while the Bank of Japan stands pat as well, Perez said it will continue to trade in the 140-149 range.
“We will need to see if BOJ officials show any signs of pivoting toward hawkishness, at which point the yen will rally and perhaps go toward the low 130s,” he said.
The broader forex reaction was more subdued. The U.S. Dollar Index, which measures the dollar against a basket of six currencies, dipped following the address before spiking and was trading up 0.19% while trending back toward where it began the day.
BOJ Gov. Kazuo Ueda is one of several international central bank officials attending the symposium, which ends Monday. Ueda will be part of a globalization panel on Saturday, alongside WTO Director-General Ngozi Okonjo-Iweala and Bank of England Deputy Gov. Sarah Breeden.
The reaction in the stock market was modest, as major indexes retreated slightly after the remarks but returned to gains later in the day.
Powell indicated that the Fed was concerned with both being too slow in tightening monetary policy and the risk of raising interest rates too high, which “could also do unnecessary harm to the economy,” he said.
Inflation cooled to around 3.2% in July, down significantly from the highs of last year where it peaked in June at 9.1%, but still off the Fed’s 2% target. The consumer price index increased 0.2% in both June and July, but Powell repeatedly stated that the Fed’s job was far from over.
“Two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” he said.
Despite the monetary tightening, economic activity has proved resilient.
“Our reaction is very neutral,” said Perez, of Monex USA.
“The dynamics of the post-pandemic reopening have been such that everything is on the up and up, but in a weird, unpredictable way,” he said.
And with a strong economy, Perez said the Fed can now confidently say it will do what it needs to do as far as rate increases without fearing too much that increased borrowing costs will significantly hurt the economy.
“Things have progressed in a way that it makes sense for the U.S. not to cut interest rates anytime soon,” he said.
Powell said the Fed is sensitive to new data showing that the economy has not slowed down, and could proceed to hike rates accordingly.
“We are attentive to signs that the economy may not be cooling as expected,” Powell said.
The Fed has raised benchmark policy rates from almost zero to a range of 5.25% to 5.5% — a 22-year high — and is expected to hold rates at their current level after its next meeting on Sept. 20.
