Fed: Brainard struck a dovish chord at almost every turn - RBS

Research Team at RBS, notes that the Fed’s Brainard struck a dovish chord at almost every turn yesterday as her speech focused on the “New Normal” for the US economy which she suggested had 5 key features.

Key Quotes

“Below those features are listed in bold, in the order Ms. Brainard discussed them.

1. Inflation Has Been Undershooting, and the Phillips Curve Has Flattened. “…to the extent that the effect on inflation of further gradual tightening in labor market conditions is likely to be moderate and gradual, the case to tighten policy pre-emptively is less compelling.”

2. Labor Market Slack Has Been Greater than Anticipated. – “the presence of uncertainty and the absence of accelerating inflationary pressures, it would be unwise for policy to foreclose on the possibility of making further gains in the labor market.”

3. Foreign Markets Matter, Especially because Financial Transmission is Strong. – “Headwinds from abroad should matter to U.S. policymakers because recent experience suggests global financial markets are tightly integrated, such that disturbances emanating from Chinese or euro area financial markets quickly spill over to U.S. financial markets. The fallout from adverse foreign shocks appears to be more powerfully transmitted to the U.S. than previously.”

4. The Neutral Rate is Likely to Remain Very Low for Some Time – “These estimates [of a low neutral rate] imply that it may require a relatively more modest adjustment in the policy rate to return to neutral over time than previously anticipated.”

5. Policy Options Are Asymmetric. “From a risk management perspective, therefore, the asymmetry in the conventional policy toolkit would lead me to expect policy to be tilted somewhat in favor of guarding against downside risks relative to pre-emptively raising rates to guard against upside risks.”

The above phrases are just a few examples of the dovish stance taken by the Ms. Brainard. Of course, Ms. Brainard’s view is not the be-all, end-all for FOMC policy. But her comments strike a clear bias to be cautious and to defend the recovery currently in place rather than tighten too soon. So as we wait for more technical evidence that the selloff has exhausted itself before reengaging, Ms. Brainard’s comments do suggest that a steady Fed, one of the fundamental pillars supporting our dip buy mentality, remains in place.”