US dollar rallies after comments from NY Fed President Williams

The US dollar rose around 30 pips across the board as NY Fed President John Williams spoke on CNBC. US equity futures also gave up gains.

Here is exactly what he said:

“We aren’t really talking about rate cuts right now. We’re very focused on the question in front of us, which is– as Chair Powell said — the question is: Have we gotten monetary policy to a sufficiently restrictive stance to ensure that inflation comes back down to 2%. That’s the question in front of us and that’s the question we’ve been thinking about for the past five months and that’s the question we will be thinking about for some time. That’s the topic of discussion for the committee….the discussion really at the FOMC right now is about ‘do we have monetary policy at the right place’ not speculating about what will happen in the next year’.”

He later added that “it’s premature to be even thinking about March cuts”. The market is pricing in a 76% chance of a March cut, down from 80% yesterday.

I take this as the usual meeting-by-meeting mantra from the Fed and trying to preserve optionality but the market is taking it as a pushback on Powell. I’m not sure I agree but the market certainly did get out on its skis a bit.

He also said “if we get the progress I’m hoping to see on monetary policy it will be kind-of natural to lower rates”.

Compare this to what Powell said on Wednesday:

“So the way we’re looking at it
is really this. When we started out, right, we said the first question is how fast to move, and we
moved very fast. The second question is, you know, really, how high to raise the policy rate, and
that’s really the question that we’re still on here. We’re very focused on that. As I mentioned,
people generally think that we’re at or near that and think it’s not likely that we will hike, although they don’t take that possibility off the table. So that’s — when you get to that question,
and that’s your answer, there’s a natural — naturally it begins to be the next question, which is
when it will become appropriate to begin dialing back the amount of policy restraint that’s in
place. So that’s really the next question, and that’s what people are thinking about and talking
about. And I would just say this, we are seeing, you know, strong growth that appears to be
moderating, We’re seeing a labor market that is coming back into balance by so many measures,
and we’re seeing inflation making real progress. These are the things we’ve been wanting to see.
We can’t know — we still have a ways to go. No one is declaring victory. That would be
premature, and we can’t be guaranteed of this progress. So, we’re moving carefully in making
that assessment of whether we need to do more or not. And that’s really the question that we’re
on, but of course, the other question, the question of when will it become appropriate to begin
dialing back the amount of policy restraint in place, that begins to come into view, and is clearly
a topic of discussion out in the world and also a discussion for us at our meeting today.”

Q: Can you gives us some color on that discussion:

“Sure. So it comes up in this way today. Everybody wrote down an
SEP forecast. So many people mentioned what their rate forecast was, and there was no back and
forth, no attempt to sort of reach agreement, like this is what I wrote down, this is what I think,
that kind of thing. And a preliminary kind of discussion like that, not everybody did that, but
many people did. And then, and I would say there’s a general expectation that this will be a topic
for us looking ahead. That’s really what happened in today’s meeting. I can’t do the head count
for you in real time, but that’s generally what happened today.”