(Reuters) - Rising risks and recent soft data shouldn’t prevent solid growth for the U.S. economy this year, but the Federal Reserve will remain “patient” in deciding on further interest rate hikes, Fed Chairman Jerome Powell said on Tuesday.
There was little initial market reaction to the release of Powell’s prepared testimony in advance of a hearing before the U.S. Senate Banking Committee, where he reaffirmed the policy shift made by the U.S. central bank in January, citing “cross-currents and conflicting signals” that weakened the case for further rate increases and made an otherwise positive outlook less certain.
* Fed’s Powell says a reasonable starting point for an estimate of Fed’s future reserves is around 1 trillion dollars plus a buffer
* Powell says does not find rise in wages troubling from an inflation standpoint
* Powell says U.S. oil industry is effectively a shock absorber for oil-driven inflation
* Fed’s Powell reaffirms that U.S. central bank will take patient approach to future monetary policy changes
* Some recent economic data has “softened,” but 2019 U.S GDP growth expected to be “solid” though slower than 2018 - Powell
* Powell says recent U.S. government shutdown expected to have had only “fairly modest” impact on economy and that would “largely unwind” in next several months
* Fed sees some signs of stronger wage growth, expects inflation to run close to its 2 percent target after transitory effects of recent energy price declines abate
* Powell says Fed now in position to evaluate “appropriate timing and approach” for the end of its balance sheet runoff
STOCKS: S&P 500 turns slightly higher after strong February U.S. consumer confidence data, last up 0.06 percent
BONDS: U.S. Treasury yields firm; 2s at 2.4980 pct; 10s at 2.6572 pct
FOREX: The U.S. dollar index little changed, off 0.05 percent
JACK ABLIN, CHIEF INVESTMENT OFFICER, CRESSET CAPITAL MANAGEMENT, CHICAGO
“He is saying sort of what we have been reading – conflicting signals. If you have a positive consumer you should have a positive economy and that may be reinforced by the confidence number that assuaged a lot of investor concerns.
“It seems like he is just reiterating that message and as long as we have steady growth with no inflation that should keep the Fed at bay. This notion the Fed has been probably trying to shift itself away from trying to rearm itself with ammunition to fight the next downturn, that was really the one big change in Fed strategy which is now obviously embraced by investors.”
KEITH LERNER, CHIEF MARKET STRATEGIST, SUNTRUST ADVISORY SERVICES, ATLANTA
“The big takeaway is he’s reaffirming the patient approach. The Fed is not rushing to increase rates here. The U.S. economy seems fine, though they did see some weakness specifically on the global economy. They’re watching the financial markets.”
“The way the market received the message last time is consistent with his current view. There has been volatility around his past testimony, and this gave him another time to restate his message.”
JON HILL, INTEREST RATE STRATEGIST, BMO CAPITAL MARKETS, NEW YORK (via email)
“As Powell’s testimony gets underway, his comments at first glance appear to reiterate the characterization of the economy that he presented following the January FOMC. This makes intuitive sense, given ongoing mixed signals from the economic data and persistent downside risks globally, but largely does not represent new information for the market. The description of the economy as solid but slowing is consistent with short rates approaching, if not at, neutral. That being said, any Q&A certainly could still spark price action as 5s/30s has steepened to a 12-month high.”
ERIK NELSON, CURRENCY STRATEGIST, WELLS FARGO SECURITIES, NEW YORK:
“I am not seeing a lot of new in Powell’s comments. They were pretty much as advertised and pretty much what we saw back in January and we’re seeing limited reaction in the FX market, which is I think consistent with that. Powell wasn’t more dovish than what we saw in January, but he’s certainly less hawkish than he was last year. The thing is, the market has already priced in this seismic shift from the Fed toward a more neutral or more data-dependent stance.”
CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE, NC
“The statement itself was designed by Powell to be pretty neutral. I don’t think he wanted to make any market moves.”
“What was interesting was that he continues to use the word patient and he’s also using the word transparency. Those are the two key words. He’s indicating the Fed is on hold. I don’t think the Fed is done with this rate hiking cycle.”
“The most important thing to the market is that you’ve an independent Fed that’s going to do the right thing whatever pressure they face from the White House or from Congress ... The Fed should only care about the economy.”
“The prepared statement is not meaningfully different then what has been said previously.”
“The question will be how Powell responds to questions from Senators, whether they push him on details for what exactly changed between December and now and what that means going forward.”
OMAIR SHARIF, SENIOR U.S. ECONOMIST, SOCIETE GENERALE, NEW YORK
“There is nothing here to suggest the Fed will move rates before mid-year at least. He explained why the Fed paused in January. As far as the forward-looking language, the Fed will be data dependent. He hasn’t tipped the Fed’s hands. Maybe the Q&A, there will be more coming out. It could be made he was a little more optimistic than earlier.
“We were looking for where he stands if things come in line with the Fed’s projections, say 2.0 percent to 2.5 percent growth, are we done with hiking rates like Williams, Daly and Kaplan? Another camp that has emerged is with Mester, Harker and Rosengren, maybe we could do another hike this year. It is not clear where Powell is here.”