Let's get to the big story breakdown.
Feter Powell speaking to the importance of community banks this morning.
He did not comment on monetary policy.
Now the Federal Reserve made a cautious rate cut back in September, signaling a gradual easing cycle with more cuts possible, the job market stays weak.
The FOC minutes showing officials were largely united in the latest month.
Now, separately, the of the Genius Act is expected to boost US dollar-backed stablecoins, but their impact on the dollar and treasury markets remains limited due to small market size, as well as some restrictions on international growth.
Now the US currency is having a strong week, especially against the Japanese yen, while stocks are pushing higher even as treasury yields hold steady.
Joining me this morning to weigh in.
Is Elias Hadad, vice president and senior market strategist at FX at Brown Brothers Harriman.
Elias, thank you so much for joining us.
So first and foremost, we are awaiting data, but given the government shutdown, we have not been receiving some of those key numbers regarding the labor market and inflation.
But what signal did the Fed send with its September risk management rate cut?
I mean, the minutes, they weren't, there wasn't any big surprises.
And by the way, thank you very much for having me on your show again, uh Remy.
But I didn't see any big surprises to the uh FOMC uh September meeting in minutes.
I mean, the, uh, I think that the, the key here is that uh There's going to be more cuts in the pipeline, as most participants judge that it's going to be appropriate to ease policy further.
Remember, the FOMC 2025. plot suggests that there's another 50 basis points of easing by year end.
Uh, so no surprise there.
Perhaps the biggest, I would say a hawkish surprise from those minutes is that uh there was a few participants uh that uh stated there was some merits uh to keep the funds rate unchanged at that, at that September.
Meeting or they could have supported such a such a decision, but it's such a minor, when you, when they say a few, I mean, we're talking maybe less than 2, so it's not, it's it's not a significant hawkish surprise, but that if, if you're looking for, you know, something that could uh reinforce this risk management cut, that was probably one of the sentences.
You know, otherwise, I think going forward, uh, I think the risk is, is that the Fed.
Uh, turns more dovish by the December, uh, FOMC meeting, uh, especially considering that I think that, you know, monetary policy is too restrictive right now and that risk uh worsening the already fragile labor market backdrop.
And at the same time, I look at inflation dynamic, yes, inflation is there it is, is high and, and not making progress towards the Fed's 2% inflation goal.
Uh, but the upside risk to inflation, they're not materializing, right?
And a lot of those leading inflation indicators, like I look at the ISM PMIs that the prices paid index from the manufacturing services PMIs, it looks like they're topping out now.
Uh, so I think that we'll see.
I think the risk is the Fed turns more dovish by December, especially if the, if once we have the non-farm payroll sprint for September and and October, and, and they show further weakening in labor demand.
Um, I think that could lead to a further downward adjustments to rate expectations in the US, uh, that can lead to a further weakness in the US dollar.
Yeah, and speaking of which, I do want to shift our focus on over to the US currency as well as stablecoins.
So as you mentioned, a rate cut of 25 basis points is mostly baked in for the September meeting, but with stablecoins growing in global finance and most pegged to the US currency, what impact could they have when it comes to the US currency itself as well as treasury market?
Yeah, well, that's a great question.
In fact, I discussed this in our latest quarterly outlook, right?
The common narrative right now is that this the growth in the expected growth in stablecoin, right, it's expected to balloon from roughly 300 billion right now in terms of supply to perhaps 2 trillion, some of the most optimistic scenarios suggest.
Well, that.
Means the narrative is that well this growth in stablecoins means that you'll have, you know, greater demand for the US dollar and greater demand for for Treasury bills.
Um, but you know, I, I, I would, I would probably challenge this narrative.
I think that the potential growth in stablecoin is unlikely to have a meaningful impact on the dollar of treasury for three reasons.
I mean first, you know, the stablecoin capitalization.
Even at 2 trillion will remain relatively small relative to the, you know, you look at the overall turnover in FX market, you know, daily turnover in FX market is at 9.6 trillion right now.
That's huge, right?
And you look at the supply of treasuries, overall treasuries, including Treasury bills, I think it's over 30 $30 trillion and that's expected to grow as the A US debt balloons in the next couple of years.
So from a, from a capitalization perspective, I think the stablecoin market will remain relatively small and not enough to influence the dollar or the treasury market.
Second is that I think stablecoin inflows will likely be more recycled money.
Not fresh capital.
So we'll see a switch perhaps from mutual funds that share a lot of the similarities to stablecoins, perhaps into stablecoin, but we're not going to see, you know, fresh deposits into stablecoin given that, you know, stablecoins, they don't benefit from the federal deposit insurance corporation protections and there's a lot of There's a lot of constraints that limit a new deposit from going into stablecoin, and I think finally from an international perspective, a lot of, you know, global central banks are now issuing or about to issue central bank digital currencies, and so that could limit the growth, I think, of stablecoins globally.
Um, and so that, that's why I, you know, I would say that uh narrative that stablecoin growth is a, is the silver bullet that will reverse the dollar's declining role as a primary reserve currency.
In my view, you look at, you know, US protectionist trade.
Policies and even political interference with the Fed's independence, these are big, you know, structural headwinds here for the US dollar that will continue to undermine this global currency reserve role over the long term, yeah.
OK, Elias, well, we will have to leave it there, but as always, thank you so much for joining us and thank you so much for sharing your perspective and your insights.
Anytime.
Thank you, Remy.
