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The markets took the speech as hawkish, factoring in a greater, but not yet a fully implied, chance of a US interest rate hike in September, at 61% probability of a 25bp hike, up from 43%, strengthening hike expectations across the spectrum.
However, the rand’s weakness has not been substantial, reaching R16.19/USD on Friday from below R16.00/USD, before pulling back to R16.12/USD this morning, and will likely see some further retracement towards R16.00/USD again.
In particular, Chair Warsh noted “we must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That's our job . . . our mandate . . . and our charge to keep.”
“Inflation expectations … right now … are well anchored. But they must be closely minded. It's the Fed's job to make sure that inflation expectations do not get unanchored”.
These concluding statements on inflation did not show panic or intense concern or even marked worry, but instead showed marked attention to inflation in the speech, but also the implication again that inflation is moving in the right direction.
Chair Warsh did add “price stability is not self-executing, nor is inflation necessarily mean-reverting. It is the Fed's job to deliver stable prices. The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank.”
But “the good news is that measures of inflation expectations in the medium term, by and large, look stable. And inflation compensation measures from the swaps market send a strong and similar message”.
The rand has not weakened notably against the pound or the euro, and instead has mainly moved against the US dollar, but its movements have been small in historical contrast to prior volatility, with the rand likely to see further strength.
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About the author
Annabel Bishop, Chief Economist, Investec Bank Limited South Africa
Annabel Bishop joined Investec in 2001 and is the Chief Economist. She has worked in the macroeconomic, econometric, risk, financial markets, political risk, public finance and regulatory, among other, fields for around 25 years. Annabel is the holder of the Sake/Beeld Economist of the Year award for 2010 and has won numerous monthly Reuters Econometer awards, and various Focus Economics (Economic Forecasts from the World’s Leading Economists) categories for correctly forecasting a range of economic variables. She has authored a wide range of in-house and external articles, published both abroad and in South Africa. She has also guest lectured at Gibbs, the University of Pretoria, Wits, UJ and other academic institutions, and has presented at various national and international conferences. Author of the “Financial Services sector and its support to the economy“ section in the Better Choices Ensuring SA’s Future.
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