Image: Federal Reserve.
"Get ready for the great stagflation. Sell U.S. dollars and buy gold & foreign stocks!" - Peter Schiff.
The Federal Reserve will likely cut interest rates in September, leading to questions as to whether the central reserve has been captured by the White House.
The Dollar fell broadly after the Jerome Powell waved through an interest rate reduction during a speech at a conference in Jackson Hole, Wyoming.
Despite upside risks to inflation, Powell said "the balance of risks appears to be shifting" away from inflation towards unemployment.
This means he sees the case for cutting interest rates to underpin jobs, even if inflation is not where it would ideally be.
The concession on a September cut sees stocks and rise, while bond yields and the Dollar fall.
The Pound to Dollar exchange rate is three quarters of a per cent higher on the day at 1.3514, having been as low as 1.3390 earlier in the day.
Powell said that although labour markets remain in balance, "it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers."
"This unusual situation suggests that downside risks to employment are rising. And if those risks materialise, they can do so quickly in the form of sharply higher layoffs and rising unemployment," he adds.
The context is also important: the Fed, and Powell personally, have been under tremendous pressure from the White House to cut rates.
Some economists suggest the Fed has bowed to this pressure.
"Powell caved," says Peter Schiff, Chief Economist & Global Strategist at Euro Pacific. "All FOMC members should be fired for not hiking rates. At least Powell admitted that our economy is weaker and inflation stronger this year under Trump than last year under Biden."
"Get ready for the great stagflation. Sell U.S. dollars and buy gold & foreign stocks!" he adds.
For markets, the prospect of a central bank that is beholden to politics signals risks, as it will lead to elevated inflation, while undermining confidence in U.S. institutions.
Soon after Powell spoke, President Donald Trump renewed attacks on Fed Governor Lisa Cook, whom he accuses of mortgage fraud. "Yeah, I'll fire her if she doesn't resign. What she did was bad," he told reporters.
As we note here, getting rid of Cook will allow Trump to add another friendly voter onto the Fed, opening the door to politicised decision-making in the coming months and years.
This is outright bearish for the Dollar as it implies poltically-suppressed interest rates, greater economic risk and reduced confidence in U.S. institutions.