The Daily Update - Powell's Fed Testimony and Personal Views

The major talking point today is Jerome Powell’s first testimony to the House Financial Services Committee as Fed Chair… (Unless you’re in London, then it’s probably the few inches of snow that we’ve not seen here in years. This so called “Russian snow storm” still isn’t the -20 degrees centigrade blizzard with record breaking snowfall that it was in Moscow.)

Yesterday, Powell once again outlined recent strength in the US economy, citing particularly that “growth in business investment stepped up sharply last year, which should support higher productivity growth in time.” This of course is what is needed to drive further wage growth, which in turn would add further confidence for the Fed to continue on a path towards normalising rates - assuming the “backdrop of solid growth and a strong labor market” continue. Powell, however, was also clear that “inflation has been low and stable… [and] has continued to run below the 2 percent rate that the FOMC judges to be most consistent over the longer run”. This clarification was followed by multiple clear reminders that the Fed focuses on core PCE, which is “a better indicator of future inflation” and which last read +1.5% yoy in December 2017.

Powell concluded his remarks on the future of rates stating, “In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis. While many factors shape the economic outlook, some of the headwinds the U.S. economy faced in previous years have turned into tailwinds: In particular, fiscal policy has become more stimulative and foreign demand for U.S. exports is on a firmer trajectory. Despite the recent volatility, financial conditions remain accommodative. At the same time, inflation remains below our 2 percent longer-run objective. In the FOMC’s view, further gradual increases in the federal funds rate will best promote attainment of both of our objectives.”

From these formal comments alone, affirming “further [but] gradual increases in the federal funds rate” and its broader tone, we wouldn’t have expected much of a market reaction or change in number of rate hike expectations for this year. Indeed shortly after the statement US Treasury 10-year yields fell slightly to 2.85%. However as markets digested the full contents of Powell’s comments, including what seemed like a lot of his “personal view[s]” (in contrast to Yellen’s more stalwart approach) both stocks and bonds subsequently sold-off, with the Treasury curve slightly flattening whilst the dollar strengthened. The S&P 500 was down -1.27% and 10-year US Treasury yields now stand at 2.90% (at time of writing), still 5bps off of last week’s highs that followed a higher than expect CPI reading.

We don’t think that 3 hikes this year are now guaranteed (or that 4 hikes are more likely) just because Powell’s “personal outlook for the economy has strengthened since December” but we certainly do agree with much of the Fed’s solid growth and modest inflation outlook. It will be interesting to see how the market deals with a perhaps more expressive Fed Chair, accounting for his almost 6 years in the FOMC but also recognising his weaker background in Economics and monetary policy compared to heavyweights like Yellen (in fact, he’s the first Chair in 30 years not to have a PhD in economics).

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.