US Dollar and Stocks Rally After Fed Chair Powell Senate Testimony

Federal Reserve Chairman Jerome Powell testified before the Banking Housing and Urban Affairs of the US Senate Tuesday. The stock market which had been sold off after Netflix missed earnings rebounded as did the US dollar on his words. 

Federal Reserve Chairman Jerome Powell testified before the Banking Housing and Urban Affairs of the US Senate Tuesday. The stock market which had been sold off after Netflix missed earnings rebounded as did the US dollar on his words.

Fed Jerome Powell

The market reaction was telling with the more speculative NASDAQ 100 index hitting a new all time high after he testified. Just last week Powell had seemed unsure of much in an interview with MarketPlace radio. The immediate thought then was how does no one at the Federal Reserve have any clue as the key reward system of the economy, wages? Yet they admit that and then Powell goes on to say he’s pleased with the rising interest rates, inflation, not worried about trade wars ‘overly’. We had much of the same today but with more concise and direct answers from the Chairman.

Highlights From Powell’s Testimony

What got stocks and the dollar up was the Fed Chairman’s outlook for:

  1. Gradual rate hikes
  2. Solid growth
  3. Ongoing strength in the labor market.
  4. Not stressed by trade wars
  5. Inflation nearing objective
  6. Successful Bank Stress Tests

Yield Curve and Rates

  • What really matters for monetary policy is where the neutral rate
  • The importance of yield curve is the message it gives about the neutral rate
  • The yield curve gives a  message on long run rates

Ongoing Strength in The Labor Market

  • The level of long-term unemployment has come down dramatically
  • Hope that gains in participation can be sustained.
  • The labor market has strengthened, workers are better off
  • Glad that the Fed allowed labor market to strengthen

Bank Stress Tests

  • This year’s stress test is most stringent yet
  • No negotiations with Goldman, Morgan Stanley on stress tests
  • Some asset prices are high
  • Banks are well capitalized


  • Inflation has been below our 2% objective.
  • We want to see inflation continue to move up so it symmetrically around 2%
  • Our monetary policy is designed to get inflation up toward 2% targets
  • Fed is just shy of achieving symmetrical inflation goal

Trade Wars

  • Generally speaking, countries that are open to trade have grown faster
  • Countries that have gone more in a protectionist mode have done worse.
  • Does not see the European Union as a foe to the United States
  • Households are in good shape It is hard to say what the outcome will be given the broad trade disputes
  • If it results in lower tariffs for everybody that would be a good thing

Solid Growth and Tax Bill

  • In the near term US economy looks good
  • We expect tax, spending to help growth next 2 to 3 years
  • Tax bill had positive effect on US economy gradually raising rates is the way to extend the expansion 

There is little doubt that the last successive Fed chairs has lulled markets into complacency and a concept of no risk. Former Fed chair Janet Yellen had  even said the stockmarkets will not crash in her lifetime at one point.. The idea of a Fed “put” option under the three prior Fed leaders; Janet Yellen, Ben Bernanke and Alan Greenspan has been a feature of the bull market run since 2009. The US markets have reached a new level of silliness, no risk appreciation of trade wars, conflicts in Europe, political breakdowns in the U.K.. Germany and France. The nonsense that is Turkey politics. A new regime in Mexico, laughable NAFTA talks. The threat of Iran. What direction does China go? We could go on but what’s it matter, market players will tell you it doesn’t and its different this time.

Words like Powell’s only further foster no risk awareness. Be aware and I will leave you with headlines from his chat.

Highlights From Powell’s Marketplace Interview Last Week (For Comparison)

  • Have seen wages move up ‘a little bit more’ in the past year
  • Productivity has been very low
  • Still a bit of a puzzle in that we’re hearing about labor shortages now all over the country in many, many different occupations in different geographies.
  • And one would have expected, I would have expected, that wages would move up a little bit more
  • “We don’t really have an answer” to why wages haven’t been rising faster I think we’re starting to see higher wages
  • Phillips curve relationship “is not very strong at all now” I’m pleased with the results of gradual hiking so far
  • We are hearing a rising level of concern about the effects of changes in trade policy
  • Trade is very difficult to predict how it turns out and we’ll just have to see
  • “The fiscal changes that were made at the end of last year and earlier this year, the tax reform, the tax cuts and the spending increases are very likely in our view, and in my view, to support economic activity here in the United States for at least the next few years.”
  • Longer term, it is widely understood that the United States is on an unsustainable fiscal path

If we look back at  2008 we saw an inflation obsessed Fed who stood by as subprime mortgage products led to systemic problems in markets that lead to the worst global recession since the 1930s.  Of note is that back when Powell first became a Fed governor back in 2012,  he was one of the hawks who pressured then chair Bernanke for more clarity on his plan to “taper” the central bank’s bond buying or quantitative easing.

Following Bernanke’s plan we had the media termed “taper tantrum” bond market rout in the summer of 2013. Again in 2015 Powell showed his ‘hawkish talons’ when he argued two interest rate rises might be needed. He did backtrack when the Chinese stock market melted down that year. The Fed raised rates only once in 2015, in December.

Powell’s speeches have been consistent on how the extended loose U.S. monetary policy has given the labor market time to recover, allowing the unemployment rate to fall from a high of 10 percent in 2009 to a 17-year low of 4.1 percent in January this year. So does the Fed take actions that sustain the expansion or dwell on potential inflation headwinds?

Jerome H. Powell took office as Chairman of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System’s principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028

He is in for a long time, lets see how the market reacts when he does?. 

Source: The Marketplace

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