Financial markets have been jittery ahead of the first Capitol Hill appearance of new Federal Reserve Chairman Jerome Powell, but investors appear to be going with a slightly hawkish interpretation.
Powell’s comments didn’t exactly spook the market. In fact, Powell said headwinds have turned into tailwinds, and the U.S. economy is strengthening.
Gold prices moved a bit lower, as did treasury yields. Overall, the market remained steady in early trading Tuesday upon the release of Powell’s prepared comments, just ahead of his 10 a.m. EST testimony on Capitol Hill.
Powell isn’t concerned right now, but he’s still sleeping with one eye open and calls for all to be “alert” for signs of financial imbalances.
“In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2% on a sustained basis,” Powell said in prepared remarks released early by the House Financial Service committee.
And Powell said the Fed views further, gradual increases in the federal funds rate as the right policy stance.
While the Fed has already planned on three rate hikes this year, the debate ensues as to whether this is enough.
Powell told the House panel that the economy seemed to be strengthening.
“Fiscal policy is more stimulative and foreign demand for U.S. exports is on a firmer trajectory, he noted.
“The robust job market should continue to support growth in household incomes and consumer spending, solid economic growth among our trading partners should lead to further gains in U.S. exports, and upbeat business sentiment and strong sales growth will likely continue to boost business investment,” Powell said. Related: Market Commentary Contradictions
The end result, per Powell? This should push inflation up, and wages should increase at a faster pace.
But the bogeyman of interest rate hikes continues to loom large.
Powell said that recent moves by Congress to stimulate spending should help inflation move up this year, and that inflation should stabilize around his preferred target in the medium term.
If the Fed expects an acceleration in inflation, it might respond by raising interest rates more than the three plans it’s already got penciled in. This makes markets anxious.
Last month, signs of inflation gained strength, raising expectations that the Fed might make a more aggressive move. This hit stock prices hard, globally, with losses of 10 percent across the board.
The anxiety hasn’t been eliminated entirely, though. After it meets again on 21 March, the Fed will release its next forecast and most likely make its first interest-rate raise for 2018.
The stock market was watching closely to see how Powell debuted before Congress, and whether he could strike the right balance between hawk and dove. So far, so good, and the stock market rally may hold on.
By Fred Dunkley for Safehaven.com
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