• Fed's Powell nods to stronger economy, backs gradual rate hike path
Federal Reserve Chairman Jerome Powell, in his first public appearance as head of the U.S. central bank, vowed on Tuesday to prevent the economy from overheating while sticking with a plan to gradually raise interest rates.
Testifying before the U.S. House of Representatives’ Financial Services Committee, Powell acknowledged the economy had strengthened recently, a remark that prompted investors to increase bets on four rate increases in 2018.
The Fed’s last round of economic projections in December pointed to three rate increases this year.
Powell’s overall tone, however, was one of continuity, as he told lawmakers the Fed would balance the need to guard against excessive inflation with the benefits of allowing the economy to enjoy the “tailwinds” of tax cuts and strong global growth.
He said the Fed was in a “process of discovering” how low unemployment could fall before inflation took hold. The U.S. unemployment rate is at a17-year low of 4.1 percent.
Federal Reserve Chairman Jerome Powell played down concerns about recent market volatility, arguing Tuesday that the dramatic swings do not weigh heavily on his outlook for the economy and maintaining his expectation for further gradual increases in interest rates.
• Traders boosted bets the Federal Reserve will squeeze in a fourth rate hike this year after new Chairman Jerome Powell told a congressional committee that recent data has strengthened his confidence on inflation.
• “I think each of us is going to be taking the developments since the December meeting into account and writing down our new rate paths as we go into the March meeting,” Powell said in his first congressional testimony as Fed chair. Incoming data suggests the economy is strengthening and labor markets are strong. “We’ve seen some data that will in my case add some confidence to my view that inflation is moving up to target; we’ve also seen strength around the globe and we’ve seen fiscal policy become more stimulative.”
• The Fed is widely expected to raise rates next month and in December signaled a total of three rate hikes this year. Fed officials will release new forecasts, including their views on the appropriate future path of rate hikes, when they meet next month.
• The dollar hit a three-week peak on Tuesday after Federal Reserve Chairman Jerome Powell’s remarks before U.S. lawmakers suggested a willingness to adopt a more hawkish stance if needed to prevent the economy from overheating, even as he said the central bank would stick with gradual interest rate increases.
The dollar index, which measures the greenback against a basket of six other major currencies, has climbed 2.5 percent since hitting a three-year low more than a week ago. It was last up 0.6 percent at 90.356, after earlier reaching a three-week peak of 90.498.
In late trading, the dollar was up 0.44percent against the Japanese yen at 107.36 yen.
The euro, meanwhile, fell to a three-week low against the dollar and last traded down 0.7 percent at $1.2231.
• “We felt that the testimony provides insight into a Fed that may pivot to a more hawkish platform, particularly if it continues to see encouraging data points,” said Marvin Loh, senior global market strategist at BNY Mellon in Boston.
“The markets, which had been mostly unchanged prior to the question-and-answer session, have since taken this hawkish tone to heart,” he added.
Some of the headwinds the U.S. economy faced in previous years have turned into tailwinds, Powell said, noting recent fiscal policy shifts and the global economic recovery.
• The U.S. economy is on track to expand at a 2.6 percent annualized rate in the first quarter following releases of the government’s latest data on advance trade balance and durable goods orders, the Atlanta Federal Reserve’s GDPNow forecast model showed on Tuesday.
The latest estimate on gross domestic product was slower than the 3.2 percent growth pace calculated on Feb. 16, the Atlanta Fed said.
• New orders for U.S.-made capital goods fell for a second straight month in January and shipments barely rose, pointing to a slowdown in business spending on equipment after robust growth in 2017.
•World stock markets broadly fell and government debt yields rose on Tuesday as traders perceived tighter U.S. monetary policy than forecast this year after remarks by the new Federal Reserve chief in testimony before the U.S. Congress.
Fed Chairman Jerome Powell pledged to balance the risk of an overheating economy and the need to keep growth on track in his prepared testimony. But Powell’s remark that inflation has strengthened since December sent yields higher and stocks lower.
The yield on the 10-year U.S. Treasury, the global benchmark for commercial lending, jumped past 2.9 percent and equity markets in Europe and Wall Street turned south, with MSCI’s key index of global equity performance falling almost 1 percent. The three major indices on Wall Street fell more than 1 percent.
Germany’s 10-year bond yields rose 3 bps to 0.677 percent, shrugging off news that German inflation has slowed.
• Oil fell on Tuesday, its first decline in five days, pressured by a firmer U.S. dollar and expectations that upcoming weekly data will show an increase in U.S. crude inventories.
• Brent crude settled at $66.63 a barrel, an 87 cent drop from Monday. U.S. West Texas Intermediate crude CLc1 fell 90 cents to $63.01. Those settlement prices represented a modest recovery from session lows, when benchmarks had slid more than a dollar.
Reference: Reuters, CNBC
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