February 27, 2018 / 1:51 PM / 4 months ago

Instant View: First congressional testimony by Fed Chair Powell

(Reuters) - Federal Reserve Chairman Jerome Powell, pledging to “strike a balance” between the risk of an overheating economy and the need to keep growth on track, told U.S. lawmakers on Monday that the central bank would stick with gradual interest rate increases despite the added stimulus of tax cuts and government spending.

FILE PHOTO: U.S. Federal Reserve Chairman Jerome H. Powell meets with Australian Prime Minister Malcolm Turnbull (not pictured) at the Federal Reserve in Washington, U.S., February 22, 2018. REUTERS/Sait Serkan Gurbuz

Story:

KEY POINTS:

** Powell says Fed policy committee will strike balance between avoiding overheated economy and moving inflation to 2 pct target

** Powell says further gradual interest rate hikes will best promote Fed’s inflation, employment objectives

** Powell says Fed’s policy-setting committee views near-term risks to economic outlook as roughly balanced but will continue to monitor inflation closely

COMMENTS:

JASON WARE, CHIEF INVESTMENT OFFICER, ALBION FINANCIAL, SALT LAKE CITY

“It’s maybe a touch more hawkish. One thing that surprised some was that he seemed to directly mention the stock market and recent volatility as something they’re not concerned about.

“He mentioned “recent volatility” as something that doesn’t concern him. Not that the Fed should be doing that – paying attention to the stock market in the short run isn’t something the Fed should be focused on - but the feature in Bernanke and Yellen was this propensity to, while not explicitly paying attention to stock prices, closer attention than any Fed regime before them. He came out and said these are not something to be nervous about, we are on pace for gradual rate hikes. It was very sober in the face of what has been a pretty interesting month in the stock and bond market.”

JOHN DOYLE, VICE PRESIDENT OF DEALING AND TRADING, TEMPUS INC., WASHINGTON

“It appears to be a very similar message we were used to from Yellen.  He sees further gradual rate hikes and does not appear to indicate he is comfortable with higher inflation before raising rates further.  I think some thought that Powell might take this opportunity to indicate a more aggressive message on the rate outlook but that did not happen today.”

ROBERT ALBERTSON, PRINCIPAL AND CHIEF STRATEGIST, SANDLER O’NEILL + PARTNERS, NEW YORK

“This is a continuation of where this Fed was under Chair (Janet) Yellen. There are no changes at all. We have to be looking further down the road as to what actually happens from the tax cuts and jobs act. That is not going to hit the data until at the earliest next month where we will get a little flavor for personal income because the withholding tables will have changed and people will realize they have more money. That is number one.”

“Number two, capital spending, business spending, has been accelerating. Not clear yet whether that is a trend. We are not going to know that probably until March.”

MICHAEL O’ROURKE, CHIEF MARKET STRATEGIST, JONESTRADING, GREENWICH, CONNECTICUT

“It’s only mildly hawkish. He’s saying the Fed remains on course to do what it’s been doing and as of now he doesn’t see it changing. I don’t think it’s a surprise but we’ve gone through the last five years with the Fed erring on the side of caution and avoiding hawkish comments.”

“It’s justified. I don’t think anybody should be worried by it ... It’s all a balance. If the economy continues to accelerate or heat up policy is supposed to get tighter.” 

KEVIN LOGAN, CHIEF U.S. ECONOMIST, HSBC SECURITIES IN NEW YORK

“[Powell] is reflecting the views of the committee, rather than striking out on his own. The committee’s views have been evolving over time and they’ve been expressed in the policy statements and what he’s saying today reflects that.”

“Although there has been some financial market turbulence [Powell] doesn’t think that will weigh heavily on the economic outlook… He notes that there is some fiscal stimulus in the pipeline and that reinforces their view about steady growth in the economy this year. That leads to a monetary policy outlook in which they will continue to gradually reduce accommodation.”

“There are not a lot of surprises here. Powell is playing it right down the middle.”

RANDY FREDERICK, VICE PRESIDENT OF TRADING AND DERIVATIVES, CHARLES SCHWAB, AUSTIN, TEXAS

“Futures were down when I got in here and I think that was tentativeness ahead of his speech. Pretty much the market is going to be fluttering back and forth in both directions based on things he says today so it doesn’t surprise me too much. It’s his first speech, the market is already in a higher volatility phase,  we had a pretty good up day yesterday so there is room for a little bit of a pullback today.”

“The last thing he wants to do is rattle the markets so we are going to see fluctuations of a few points here or there while he is talking.”

TOM PORCELLI, CHIEF U.S. ECONOMIST, RBC CAPITAL MARKETS, NEW YORK

“I don’t think there was a ton here that was newsworthy or noteworthy. He struck a generally positive tone on the backdrop, which given the backdrop, it lends itself to striking a positive tone. I think it would have been shocking if he didn’t go in that direction. Our hope is we’ll get a little bit more out of the Q&A.”

GUY LEBAS, CHIEF FIXED INCOME STRATEGY, JANNEY MONTGOMERY SCOTT, PHILADELPHIA

“From a 10,000-foot view, Powell’s prepared remarks are common-sense.  It’s more interesting to see that the market is interpreting the comments as somewhat hawkish, and that’s more informative about the trading bias right now than about the Fed’s actually likely policy path.”

MARKET REACTION:

STOCKS: U.S. stocks slightly extend light premarket losses. The S&P 500 e-mini futures EScv1 were down 0.16 percent and the Dow e-mini 1YMc1 was down 0.14 percent.

BONDS: The 10-year Treasury bond yield firmed to 2.8770 percent and the two-year Treasury note yield rose to 2.2299 percent.

FOREX:

The U.S. dollar index .DXY was little changed, up 0.11 percent.

Compiled by Alden Bentley

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