Federal Reserve Chairman Powell testified before the U.S. Senate today on Capitol Hill in the first of two testimony before U.S. lawmakers. The Fed chairman will speak before the House of Representatives tomorrow.
During his testimony today, the Fed chairman explicitly said he would not talk about changing the interest rate schedule, though he indicated that it would likely be a rate cut. He described the risks as being in both directions, not just skewed toward inflation. He commented on two occasions that the labor market has slowed. so farBut he believes that employment has not been a major contributor to inflationary pressures.
The president’s comments kept the September cut on the table, and the possibility of two cuts remains a “preferred” possibility (with December pricing in 75%).
Below is a summary of the President’s key points on politics, the economy, inflation, growth and employment.
Politics and decision making:
- The Fed remains committed to its 2% inflation target and to maintaining long-term inflation expectations.
- Decisions on price adjustments will be made carefully, taking into account incoming data, the balance of risks, and appropriate policy paths.
- There are risks of either easing restrictions too late or too little, which could weaken the economy and the labor market, or easing restrictions too early or too much, which could reverse the advance of inflation.
- The Fed will continue to make decisions on a meeting-by-meeting basis, and does not plan to cut interest rates until there is greater confidence that inflation is sustainably moving toward 2%.
Economy:
- The US economy is growing at a steady pace and performing exceptionally well compared to its global peers.
- GDP growth appears to have slowed in the first half of 2024.
Economic inflation:
- Inflation remains above the 2% target, but significant progress has been made towards this goal, with the latest monthly readings showing further modest progress.
- More good inflation data is needed to build confidence in interest rate cuts.
- The current restrictive policy is contributing to the pressure on inflation.
growth:
- The economy has been expanding strongly, but there are significant housing problems that have been exacerbated by the pandemic.
- The Fed’s tighter policy is impacting housing activity, as the best way to address housing supply issues is to lower inflation.
employment:
- The labor market has slowed significantly but remains strong and is now back to pre-pandemic levels to some extent.
- Unemployment rates remain low by historical standards.
- Wage increases, although still high, are now trending towards more sustainable levels.
- The Fed recognizes that the labor market is not a broad source of inflationary pressures now, and aims to balance the risks to achieving its employment and inflation goals.
Additional points:
- The US Federal Reserve is in discussions about possible changes to the final phase of Basel III proposals, and is close to reaching an agreement on these changes.
- Immigration is seen as neutral on inflation in the long run, but it may have short-term effects, particularly on the housing market in certain areas.
With the forex market stabilizing, the Australian dollar ended the day as the strongest of the major currencies, while the Japanese yen was the weakest. The US dollar ended the day with a mixed/modestly higher performance with modest declines against the Canadian, Australian and New Zealand dollars, and gains against the Japanese yen, British pound and euro.
The US dollar was higher on the day, but the start of this week’s coupon auctions at 1pm EST saw strong demand for 3-year notes. Not only did the auction have a negative WI tail of -0.8bps, it also had a higher than average bid-to-cover ratio. Demand was led by strong domestic buyers, which is somewhat unusual. More recent auctions were led by international demand (see auction results by clicking here).
The auction results helped ease some supply concerns that may have weighed on Treasury prices earlier in the day. Although yields ended the day higher, they were also below their highs just before the auction. The U.S. Treasury will sell 10- and 30-year notes tomorrow and Thursday.
At the end of the day, the market snapshot shows:
- 2-year yield 4.626%, +0.8bps
- 5-year yield 4.244%, +0.2bps
- 10-year yield 4.297%, +2.9bps
- 30-year yield 4.490%, +3.2bps
Fed Chairman Powell’s comments and the auction results didn’t hurt the stock market, but the price action was more up and down. However, the broader indices (i.e. the S&P and NASDAQ) closed higher again and at record levels. For the S&P, it has now closed at a new record high for four days in a row. For the NASDAQ, it has closed at a new record high for five days in a row.
- The Standard & Poor’s index rose 0.07%.
- The Nasdaq rose 0.14%.
The Dow Jones Industrial Average (30 stocks) fell -198.20 points at its session low and rose 147.48 points at its session high. The index closed down -52.82 points in volatile trading for the index.
In other markets:
- Crude oil prices fell for the third day in a row, falling by about $0.68, or -0.83%, to $81.65.
- Spot gold is trading up $5.89, or 0.25%, at $2,363.
- Silver trades unchanged at $30.79
- Bitcoin price rose to $57,958.
On the new trading day, the Reserve Bank of New Zealand is scheduled to announce its decision on interest rates with no change expected.
Tomorrow will be another quiet day on the economic calendar with Fed Chair Powell’s testimony at 10 a.m. ET and weekly oil inventory data at 10:30 a.m. ET. The U.S. Treasury will sell 10-year notes at 1 p.m. ET. Fed members Bowman and Goolsbee will speak at 2:30 p.m. ET, and Fed member Cook will speak later in the evening at 7:30 p.m. ET.