Lael Brainard's testimony was dovish. However, the fear regarding rate hikes caused by Rosengren's comments remains. The zloty remains weak, despite a better condition of the global markets.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- 14.00: Payment balance from Polan (estimations: current account negative 203 million euro; goods account negative 52 million euro).
- 14.00: Base case inflation from Poland (estimations: negative 0.4% y/y).
Dovish Brainard and skeptical market
Lael Brainard was very dovish regarding the future monetary policy in her testimony yesterday. She suggested that we are in the world of a new normality when it comes to interest rates.
Brainard took note that inflation has been below the target in fifty-one months. She claims that, “the recent events suggest that there are many reasons for a concern regarding underestimation, rather than overestimation of inflation.”
Another matter touched by the Fed representative was the labor market. In her opinion, it's still not as strong as it would result from the unemployment rate. She took note that the employment index for people within the range of 25-54 years is by one-and-a-half percentage point below the level from before the crisis.
Therefore, we do not expect inflation pressure to come from the overheated labor market. Moreover, in Brainard's opinion it would be unreasonable for the monetary policy to close the possibility of a further improvement in the labor market. We can assume that this statement was a direct reference to Rosengren's recent statements. He tried to prove that the American economy is near the natural employment level and that its further revival with a mild monetary policy may appear impermanent in the long-term.
Brainard did also not forget to mention the foreign dangers that may have a negative impact on the American economy. In her opinion, due to an increasingly larger integration between the markets, external anxieties are quickly transferred into the American financial markets. Brainard also spoke of a natural interest rate, which is significantly lower than it used to be. In her opinion, its real level is currently near zero. As a result, we may come to a conclusion that the interest rates level than neither stimulates the economy, nor cools it down, is approximately 2% (zero plus the target inflation rate). This is definitely less than 3% that was presented as estimation median in the FOMC economic projections from June.
In the end, Brainard also toke not that dangers related to the monetary policy are asymmetric. In here opinion, it's more dangerous to raise interest rates too early, instead of too late. This is because their current level is near zero. Therefore, space for its decrease is small, whereas space for increase is quite large.
It's worth keeping in mind that Brainard is one of the most dovish Fed members. On the other hand, her yesterday's testimony denied rumors that she could have changed her mind recently, just as Rosengren did.
In general, Brainard's statement has improved the sentiment in the American stock markets, as well as overvalued slightly profitability of the American treasury bonds. However, it had a minor impact on situation of the dollar. Perhaps too little time has passed from the events on Friday, when some of the market participants interpreted Rosengren's words not only as a chance for the monetary tightening in September, but also as a faster pace of rate hikes in the forthcoming quarters.
Zloty remains weak
The Polish currency did not benefit from an improvement of situation in the global market. Moreover, not only is the zloty weak against the euro or the dollar, but against the forint as well. Worse behavior of the PLN should be temporary. If the global situation is neutral or positive, the zloty should go towards the level of 4.30 per euro.
Later today, the NBP will publish the payment balance data, as well as the base case inflation data. It's rather unlikely that it will clearly impact the zloty's evaluation. Only a significant deficit of the current account (more than one billion euro) caused by a clear deterioration in export dynamics would be dangerous. Therefore, the zloty should remain relatively stable during the forthcoming hours.