Jay Powell leads today and sets the tone for risk taking into October. He has a difficult task in sounding appropriately hawkish but with enough constraint to not stifle the ongoing economy. The balancing act is between the push to get rates to neutral where they don’t hurt growth but but squelch inflation. For many this will be on display with the FOMC dot-plot charts. 2.75-3.00% is seen by most as that neutral level. Yet 1-year rates in 5-years time trade at 3.19%. The peak in FOMC rates is seen by the dot plot at 3.1% – likely going up to 3.6% in 2020 given the growth in 2018 has beaten expectations and there is a general shift up in the potential growth rate – how much so will be watched and investigated appropriately. So there is plenty to wait for and little for markets to be sad about so why would the FOMC Chair be blue? He has a more difficult task than his predecessors as he has to move up rates to a magic level and then stop. Guiding him along in this process is the board and the Fed economists, with the headwinds of political pressure and his own doubts about models. Remember in Jackson Hole he talked about the limits of nowcasting and R* debates. This leaves plenty of room for error and mistakes will follow. Perhaps that is all we need to worry about today given the otherwise light economic news where New Zealand trade and business confidence point in different directions making clear that the RBNZ is most assuredly on hold. The UK CBI retail survey was good but not great and the obsession with Brexit politics still overwhelming. This leaves the world watching US/China, listening to the UN speeches with Trump anti-globalism still ringing in ears but not generating the same fears as money flows are prices for the FOMC hike today and more trouble from Trump on global trade. The other Bluejay team is Canadian as they still have threats of a breakdown to bilateral deals as NAFTA talks waver. This leaves markets watching the US rate markets for a larger break out risk with no one terribly scared for Powell or Trump in changing the set up for global growth and policy normalizations. The lack of fear is notable and probably the key reason to think that Jay Powell will be unhappy as rate hikes are supposed to dampen the financial conditions and reduce the risks for bubbles in asset markets. That puts USD/JPY as the barometer to watch for today’s performance – just in case Powell’s talons are lost in a flurry of cooing. The dovish feather cover could lead to a quick test of 114 and target 115 in short order. While the chart suggests that the steady march up leaves room for a hawkish surprise back to 111.50.

Question for the Day: What rate really matters to markets? There are many in the FX space that will argue that it’s the real rate spreads that matter and help to explain the current stall in the USD uptrend. There are others that see the yield curve and the terminal rate as key and take spreads against that – with the FOMC terminal rate debate central today to the USD path. 3.1 or 3.6%. This is against 2.5% in Europe with the next 2-3 years expected to be one where the ECB sprints rates higher and the Fed walks if not sits out further action. The EUR/USD path isn’t just about overnight rates or 2Y or 10Y spreads. The other significant story for rate hikes mattering is what happens to the real economy and how do banks and the shadow banking sectors pass on the higher costs. This is an important point to consider – as the Goldilocks moment of the last 3 months rests on the view that the FOMC gradualism hasn’t yet mattered to the consumer or to business. The chart below from the WSJ might be worth considering ahead of those that see rates not mattering yet.