03.09.202612:00 Forex Analysis & Reviews: Rift among Fed policymakers two weeks ahead of policy meeting

The dollar gave back some ground yesterday — partly following a weak ADP report, partly due to currency intervention by the Bank of Japan, and partly after remarks by New York Fed President John Williams, which only widened divisions within the Fed ranks.

Williams said yesterday there is evidence that inflation is continuing to ease as the effects of tariffs fade and higher energy costs are not spreading to other services. "The data lately is encouraging," he said in a Wednesday interview, adding, "I do really see the inflation trend moving down slowly as some of the tariff effects move into the rearview mirror."

Williams's assessment of current policy is noticeably more sanguine than that of the hawkish wing. He supported the decision to leave rates unchanged at the July meeting and considers the current level appropriate. "Following the last FOMC meeting, interest rates are in a good place" to balance the dual mandate of full employment and price stability, he said, adding: "We're gathering a lot of data now, and we'll have to reassess that judgment."

That stance contrasts sharply with the chair's. Recall that Kevin Warsh said at Jackson Hole that he would find it hard to describe broad financial conditions as restrictive and stressed that policymakers "have work to do" if they are not confident core inflation is moving to target. Williams, by contrast, explicitly calls the current rate level appropriate, while acknowledging that tariffs and energy driven up by the Middle East conflict remain the primary inflation drivers and that elevated inflation in services still exerts some influence.

The specifics of his assessments are notable because they frame the entire dispute within the Fed. "I would expect that if we saw a sustained boom in productivity of the sort we have seen before, that would push the neutral rate up. But I have to say, right now we have not seen that," he said, estimating the neutral rate at roughly 1%. In his view, the real policy rate has risen only modestly. On that basis, a current range of 3.50–3.75% with inflation around 3.7% implies policy is already in restrictive territory — a conclusion that directly contradicts Warsh's.

Differences over how restrictive policy is were also apparent at the Jackson Hole symposium itself. Fed officials will reconvene September 15–16 in Washington after five consecutive meetings of unchanged policy; at the July meeting, three voting members dissented in favor of a quarter-point rate hike. With the market now pricing roughly a 70% chance of a September hike after Warsh's speech, and with an influential voice like Williams leaning toward the status quo, the upcoming meeting risks becoming the most contentious in months.

On the technical front for EUR/USD, buyers now need to take 1.1608 to open a path toward testing 1.1623. From there, the instrument can target 1.1641, although doing so without support from large players will be difficult. On the downside, I expect serious buying only around 1.1584; if no buyers appear there, it would be prudent to wait for a new low at 1.1568 or to open longs from 1.1550.

For GBP/USD, pound buyers need to capture nearby resistance at 1.3494 to target 1.3515, above which further gains will be challenging. A more distant target is 1.3531. If the currency pair falls, bears will attempt to take control of 1.3475; a breach of that range would severely damage bull positions and push GBP/USD toward a low of 1.3457, with a prospect of reaching 1.3435.