Fra Handelsbanken:
Fed Chairman Powell strikes a bullish tone on the economy
• Powell says rates can continue to rise gradually
• Outlook for growth remains strong aided by fiscal policy and firmer global demand
• March hike seems a done deal and risks of four hikes this year is increasing
New Fed chairman Powell appears in his first semi-annual testimony to Congress
It was never expected that the new Fed Chairman (Jerome Powell) in his first semi-annual testimony to Congress would rock the markets with any significant signals of changes to the monetary policy trajectory outlined by his predecessor. And this seemed to be accurate as there were no big surprises in his prepared remarks, that to a large degree echoed the signals from the latest FOMC statement and the subsequent minutes of last month’s meeting. As such the testimony will not in our view lead to any significant reactions on financial markets as his testimony most likeliy will not alter the current market pricing for the Fed, which following recent re-pricing currently is more in line with Fed’s own projections. In fact, the testimony might actually be perceived as slightly positive for equities, as Powell stroke an upbeat tone on the economy without signaling any need for a more significant tightening of monetary policy than already priced in. We now await the actual testimony to the House Financial Services Committee and especially the following Q&A to see if there are any new signals – even though we doubt it will be the case.
Upbeat outlook for the economy
Powell did adopt an upbeat tone with regards to the outlook for the US economy. However, this was probably hard to avoid and was also expected in light of the recently added fiscal stimuli to the economy. As such, Powell said that some of the headwinds that the economy has faced in previous years have now turned into tailwinds, as fiscal policy has become more stimulative and as foreign demand has firmed. Furthermore, Powell sees no marked negative impact on the economyt from the recent bout of heigthened market volatility, and judges that financial conditions remain accommodative. As such he indicated that ‘further gradual increases in the Fed funds rate’ seem warranted.
March hike a done deal – and the risks are on the upside
In our view the testimony locks in the outlook for a rate hike at the upcoming FOMC meeting in March, which is also almost completely priced in the futures market. For the trajectory of monetary policy for the rest of the year much will depend on the development in inflation and inflation expectations. As Congress adds stimuli to an economy already close to or beyond full employment, and with some inflation pressure already appearing in the pipeline, it is clear that Powell faces a more precarious path than his predecessor. With debt-financed fiscal stimuli set to accelerate the economy at the same time as Fed was trying to gently hit the brakes, there will be a larger degree of combativeness between fiscal and monetary policy. As highlighted in our Global Macro Update from January, we have been worried that inflation pressures would begin to mount and since then fiscal policy has become even more lose. In this light we will most likely have to revise our growth outlook for the US economy up and the risk of an overheating economy that pushes wage growth and consumer price inflation higher could be increasing. Thus, even though there were no new signals in that direction from Powell today, the risk in our view is currently tilted towards more rate hikes this year than the current Fed median projection of three further increases.
Link to the full report: http://research.handelsbanken.se/Templates/Pages/Utils/PublicationRedirect.aspx?id=85266
