Powell set to adopt a mid-cycle Fed

Source reports this morning suggest we’re hours away from a formal announcement that Jay Powell, current Fed governor, will be nominated by Trump as the next chair of the Federal Reserve. Given Powell’s already influential role it’s expected the leadership change will result in no change to the current gradual pace of tightening already adopted by the Fed. In his voting history, Powell’s always sided with the chair and towed a centrist line on policy and as such, we don’t expect much of a volatile handover when he takes the reins in February.

The FOMC decision last night was, as expected, uneventful. With no new economic forecasts, speech, press conference or broad-brush changes to the accompanying monetary policy statement, the dollar held firm as markets stick to their expectations of a December rate hike followed by 2 or 3 further hikes in 2018.

The Cut Cut Cut Act

The dollar hasn’t paid attention to the activities of the Fed this week, but has kept a much closer eye on the goings-on in the House and Senate. As a day’s delay becomes two days to a week, we’re still waiting for the official release of the final manifestation of Trump’s tax bill which the President himself is insisting is titled ‘The Cut Cut Cut Act’. This somewhat non-traditional title for the bill shows just how hard the White House is trying to sell this reform to the wider public and is willing to get blunt about it.

Markets are supposed to see the details of the ‘CCCA’ at some point today (there are already some leaked documents floating around social media) and all focus will shift not to who is receiving the tax cuts, but who exactly is paying for them. Lobbyists from sectors left, right and centre have begun to protest against what they fear could be “a tax increase for middle-class homeowners” who are shelling out to pay for lower corporation and business taxes. Any clarity on this issue will be key for the dollar that benefited so significantly from speculation of tax reform after Trump’s election win.

The Bank of England move on rates for the first time in a generation

After over ten years of interest rates at just 0.5% or lower, Mark Carney’s Bank of England have raised interest rates from an tiny 0.25% to an only slightly less tiny 0.50%. The decision and accompanying Inflation Report has proved very negative for sterling. Despite raising interest rates, the Bank indicated that this won’t be the first of many more to come by dropping inflation expectations and downgrading productivity (the UK’s chronic economic disorder) and GDP growth.

The pound’s been marked down against both the dollar and the euro and is currently on track for the biggest fall against the greenback since June, and the biggest fall against the euro since July.

The day ahead

Outside of the expected release of the tax bill and Fed chair nomination, the data calendar is relatively quiet, with markets holding out for tomorrow’s nonfarm payrolls release.

Have a great day.