USDJPY dipped from levels just under 107.00 to a low of 106.74, and then rallied to a six-day high at 107.22 during the European session, following the Navarro statement and subsequent denials from himself and the President. However the US session has seen a new significant leg lower which has punctured the previous June low of 106.56 and the daily S3 level at 106.50 to trade currently at 106.35. Below here sits the May low at 105.98.
Comments from Fed member Bullard have added to the general pressure on the USD today. He discussed yield curve control in a long, wide-ranging interview on Bloomberg TV. He said there is a debate going on, but he didn’t suggest it would be adopted anytime soon, if ever. YCC isn’t a pending thing for the Fed, he said. Yields are already low and have been for a while, and the FOMC has indicated they will remain low. Bullard stressed we should be thinking about “correct” interest rates, an equilibrium rate that makes sense for the current environment, not just “low rates.”
He noted that the US experimented with YCC in the late 40s and early 50s, and it ended in tears, while Japan’s adventure with YCC hasn’t necessarily worked. There are a lot more questions to be answered, he said, before such would be adopted here.
On the potential for asset bubbles, he’s keeping his eye on it, but he is not seeing things of the same magnitude as the dot com era from the late 1990, or the housing bubble from the late 1990s. There are inflation risks lurking, but there hasn’t been an inflation problem for a long time, and the risk of too-low inflation has been mitigated as well.
He has advocated nominal GDP targeting and its close cousin price level targeting, and they have been discussed as part of the Fed’s framework review, he added. He expects a big increase in growth in Q3 to counter the weakness from Q1 and Q2. Bullard has not lost faith in the transformational aspects of capitalism (creative destruction), but the pandemic has really thrown a curve ball to a lot of businesses.
Bullard said what’s meant by “bad business,” in terms of which should be allowed to go under. And on inflation, there are serious measurement issues around prices. For instance in Q2 there were a lot of goods that were not “traded” in the normal nature, and their price went to zero. The Dallas trimmed mean suggests a 2% rate is still in order, he suggests, giving the Fed credibility around that level. He also noted the difficulty in measuring wages. He wants to wait for the dust to settle in Q3. Bullard wants businesses and households to adapt to the virus, and not wait for a vaccine or therapeutic.
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Stuart Cowell
Head Market Analyst
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