Jerome Powell, the US Federal Reserve chairman, was markedly dovish in his Jackson Hole speech and the dollar index (DXY) responded accordingly by dropping 0.34% to 92.75.

With forex traders waiting on every word, Powell made clear that tapering could start this year but showed himself to be relaxed on when to start a rates lift-off. The 10-year US Treasury bond yield was only slightly lower at 1.31%.

Significantly, Powell was explicit in decoupling the timing of any rate rise from a slowing in the pace of asset purchases.

“The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test,” the Fed chair said.

Powell Speech Gives Fed Leeway On Rates

He made it clear that there is to be no sequencing between inflation and the interest rate rise.

Powell also reminded the market of the two tests, emphasizing that there was still a way to go on the “maximum employment” goal: “We have said that we will continue to hold the target range for the federal funds rate at its current level until the economy reaches conditions consistent with maximum employment, and inflation has reached 2% and is on track to moderately exceed 2% for some time. We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2% inflation on a sustainable basis.”

The “substantial further progress” has been met as far as inflation is concerned, in which the Fed’s framework put in place a year ago set a target of 2% and moderately higher.

It is now pretty much a racing certainty that tapering will begin this year.

Powell said: “I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year.”

The chairman has given the Fed plenty of leeway when it comes to the timing of an interest rate rise. Although he said that there had been “clear progress” in the labor market, it had to be balanced against the impact of the Delta virus on economic activity.

Risk assets rose on the remarks from Powell, with the S&P500 trading 0.7% higher and bitcoin spiking to trade above $48,000.

Euro And Pound Strength Against USD

USD/EUR is trading at 0.8478, 26 pips at the time of writing (-0.31%) and USD/GBP trades at 0.7269, down 29 pips losing 0.4.

Powell doubled down on his contention that high inflation was transitory in nature, by arguing that the economic factors that have been keeping inflation at muted levels over recent years are still in play.

“While the underlying global disinflationary factors are likely to evolve over time, there is little reason to think that they have suddenly reversed or abated,” Powell insisted. “It seems more likely that they will continue to weigh on inflation as the pandemic passes into history.”