Last week, the U.S. Dollar Index slid to its lowest level of 92 since May 2018 amid the worsening condition of COVID-19 in the U.S. and the lack of enhanced unemployment benefits after it expired late last month. The slid took a turn after the release of July’s FOMC meeting minutes. In it, the Fed expressed skepticism in using yield curve control as a tool for conducting monetary policy, disappointing many who expected the central bank to use it to curb cost of borrowing. To make matter worse, the committee members felt that the COVID-19 pandemic will have a strong negative impact on the U.S. economy in the near term, thus expressing less optimism on the economic recovery during the second half of 2020. This led to a strong sell-off in the stock market, pushing the U.S. Dollar Index higher.
The upcoming Jackson Hole Symposium this Thursday whereby Fed Chairman Jerome Powell is due to give a speech on reviewing monetary policy will determine whether the recent recovery in the U.S. Dollar Index will continue or it is merely a retracement before a further decline. The first point is the adoption of yield curve control. Although the Fed expressed little interest in this tool, the market is still hoping that Chairman Powell will highlight the necessary criteria for its adoption.
The next point in line that the market will be paying attention to is whether the Fed is considering the adoption of average inflation targeting. Inflation level in the U.S. has been below the Fed’s target range of 2-3% for many years during the last decade. By adopting average inflation targeting, the central bank is able to average out inflation levels over a period of time. Doing so will allow the Fed to target a period of inflation level that is within the targeted range rather than focusing on achieving the targeted range for individual years, thus allowing inflation to rise higher than previously before the central bank starts increasing interest rates in the future.
If Chairman Powell were to remain doubtful in the adoption of yield curve control and shies away from the idea of average inflation targeting, we may be seeing a continuation of a risk-off market which will give the U.S. Dollar Index a boost.