The U.S. economic recovery remains “uneven and far from complete” and it will be “some time” before the Federal Reserve considers changing policies it adopted to help the country back to full employment, Fed Chair Jerome Powell said on Tuesday.
Powell began is testimony before the Senate Banking Committee as Wall Street looked set for its sixth straight day of declines from last week’s record highs, although losses were pared after the release of his comments. Fears about rising U.S. Treasury yields hit the technology sector particularly hard.
The U.S. central bank’s interest rate cuts and purchases of $120 billion in monthly government bonds “have materially eased financial conditions and are providing substantial support to the economy,” Powell said in prepared remarks.
STOCKS: The S&P 500 pared losses and was last off 0.37%; The tech-heavy Nasdaq was off 1.17%
BONDS: The 10-year U.S. Treasury note yield slipped to 1.3568%; 2s were flat at 0.1109%
FOREX: The U.S. dollar index pared gains was up about 0.04%
ART HOGAN, CHIEF MARKET STRATEGIST AT NATIONAL SECURITIES, NEW YORK “What the market has been digesting for the last week or so is what it means when the yield on the U.S. 10-year rises. That clearly suggests that either we are going to get some stronger economic activity or inflation is on the rise.”
“If you made the assumption that higher inflation is on the rise and sold off some stocks, and then you got to hear from the Chairman of the Fed that they indeed plan to stick to their monetary policy of lower rates and quantitative easing then that might assuage some of those fears.”
JIM VOGEL, DIRECTOR OF INTEREST RATE STRATEGIES, FHN FINANCIAL CAPITAL MARKETS, NASHVILLE
“Powell is focusing on inflation, which is THE word for rates since November. Everything in Fed modeling about the economy and output gaps or surpluses tell it not to expect permanent inflation from stimulus or an economic rebound … In a service economy, the key surplus/shortage function is labor and it is difficult to see a shortage of labor bedeviling either US or global prices past 2022. Many of the prices that indicate shortages — particularly commodities — may apply to emerging market inflation but it would be rare for them to work their way into the Developed West.”“If we’re still here in the middle of Q3, regional (Fed) presidents will start the taper discussion again. Fundamentals, particularly the recovery in public health, however, will delay taper into 2022.”
“The best argument against a taper tantrum is the Fed’s holdings of low coupon MBS. Unlike 2013, there should not be the need for convexity hedging in the market. But, there will be a tantrum at some stage because it’s so widely anticipated.”
PAUL NOLTE, PORTFOLIO MANAGER, KINGSVIEW ASSET MANAGEMENT, CHICAGO
“The expectations were that he was going to be very dovish, and he hasn’t changed that. He is still talking about keeping interest rates very low and keeping the monetary policy pretty loose. So from that perspective, he is hitting expectations.”
MICHAEL SKORDELES, U.S. MACRO STRATEGIST, TRUIST ADVISORY SERVICES, ATLANTA“He’s very good at staying on message. It’s somewhat heartwarming that (the Fed is) not flustered by the issue of the day. There are pockets of inflation … but there are still a lot of areas of the economy that have not been repaired.”
“I haven’t heard a lot of discussion about rates (Treasury yields). In general terms, (the Fed is) taking a broader, longer perspective. Markets may be a little disappointed that (Powell’s) not going to be quite so specific. (The Fed) is trying to be a little less precise, giving themselves flexibility…Unfortunately that leads to uncertainty for the market. But if they say what they’re going to do and then conditions change, that causes volatility and uncertainty, too.”
MICHAEL ARONE, CHIEF INVESTMENT STRATEGIST, STATE STREET GLOBAL ADVISORS, BOSTON
“Powell believes monetary policy needs to be supportive. Although we’ve made progress in the recovery, there’s still a long way to go in terms of repairing the jobs market, and there’s still a long way to go before inflation becomes a concern. The conclusion from my perspective is that I’m not anticipating any changes to monetary policy anytime soon.”
ROSS MAYFIELD, INVESTMENT STRATEGY ANALYST, BAIRD, MILWAUKEE
“It’s pretty much right in line with what you would expect. The market was certainly expecting him to hold the line of asset purchases in place and committed to low rates and go into look through any kind of transitory inflation this year.”
IAN SHEPHERDSON, CHIEF ECONOMIST, PANTHEON MACROECONOMICS, NEW YORK “In one line: No surprises; still glum.
“Chair Powell broke no new ground in his testimony, emphasizing the grim state of the current economy – especially the labor market – and the uncertain outlook. He acknowledged that the Covid numbers have fallen recently, but this came after noting that the economic momentum has ‘slowed substantially’ following the resurgence of the virus in the fall, and Mr. Powell made no mention of the startling speed and extent of the drop in cases and hospitalizations.
“As the economy remains a ‘long way from our employment and inflation goals’, the Fed believes the current policy stance remains appropriate; it will be ‘some time’ before any changes are required. Inflation is no near-term threat, thanks to the impact of Covid on some sector, but the Chair reminded Senators that even when inflation does rise, the Fed wants to see it above the target for ‘some time’ before raising rates.
“Mr. Powell also emphasized that the FOMC’s new Strategy has shifted the Fed’s view of the implications of a tightening labor market; it will no longer assume that rates need to rise just because unemployment is at a low level. Mr. Powell presumably wants to try to persuade markets that a strengthening economy does not necessarily mean that rates have to rise. Good luck with that when the post-Covid surge in activity become clear.”
ERIC JUSSAUME, DIRECTOR OF FIXED INCOME, CAMBRIDGE TRUST, BOSTON
“For the most part he spoke as expected. It was short, it reiterated that short-term rates are going to stay where they are, and the pace of asset purchases isn’t going to change anytime soon.”
“He didn’t stir the markets enough to cause a selloff. Accommodation is going to be here for the foreseeable future.”
MATTHEW KEATOR, MANAGING PARTNER, THE KEATOR GROUP, LENOX, MASSACHUSETTS
“If you look back at (Powell’s) initial tenure, there was some ambiguity as to where the Fed stood. But over the last year, in response to the pandemic, he’s done an excellent job communicating their commitment to stable markets and full employment.
“There may come a time when the Fed gets concerned about (inflation) but if you look at their past comments they’re hoping for some level of inflation.
“The policy shift to an average inflation target gives them flexibility which will allow them to see if it’s transitory or sustainable.”