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Fast Comment USFed Chairman Powell strikes a bullish tone on the economy

  1. Powell says rates can continue to rise gradually
  2. Outlook for growth remains strong, aided by fiscal policy and firmer global demand
  3. March rate increase appears to be 'a done deal'; risk of four increases this year is increasing
New Fed Chairman Powell appears in his first semi-annual testimony to Congress
It was never expected that the new Fed Chairman (Jerome Powell) in his first semi-annual testimony to Congress would rock the markets with any significant signals of changes to the monetary policy trajectory outlined by his predecessor. This proved to be accurate, as there were no big surprises in his prepared remarks that largely echoed the signals from the latest FOMC statement and the subsequent minutes of last month's meeting. As such, we do not expect the testimony to lead to any significant reactions in financial markets, as his testimony most likely will not alter the current market pricing for the Fed, which following recent re-pricing is currently more aligned with Fed's own projections. In fact, the testimony might actually be perceived as slightly positive for equities, we believe, as Powell struck an upbeat tone on the economy without signaling any need for a more significant tightening of monetary policy than what has been priced in already. We now await the actual testimony to the House Financial Services Committee, and particularly the subsequent Q&A session, to see if there are any new signals, even though we doubt that would be the case.
Upbeat outlook for the economy
Powell adopted an upbeat tone with regard to the outlook for the US economy. However, this was probably hard to avoid and was also expected in light of the recently added fiscal stimulus to the economy. As such, Powell said that some of the headwinds that the economy has faced in previous years have now turned into tailwinds, as fiscal policy has turned more to stimulus and as foreign demand has firmed. Furthermore, Powell sees no marked negative impact on the economy from the recent bout of heightened market volatility, and judges that financial conditions remain accommodative. As such, he indicated that "further gradual increases in the Fed funds rate" seem warranted.
March rate increase is 'a done deal', and the risks are on the upside
In our view, the testimony locks in the outlook for a rate increase at the upcoming FOMC meeting in March, which is also almost completely priced into the futures market. For the trajectory of monetary policy for the rest of the year, much will depend on the inflation trend and inflation expectations. As Congress adds stimulus to an economy already close to or beyond full employment, and with some inflation pressure already appearing in the pipeline, it is clear that Powell faces a more precarious path than his predecessor. With debt-financed fiscal stimulus set to accelerate the economy at the same time as the Fed was trying to gently hit the brakes, there will be a larger degree of combativeness between fiscal and monetary policy. As highlighted in our Global Macro Forecast Update in January, we have been worried that inflationary pressures would begin to mount, and since then, fiscal policy has become even more loose. In this light, we will most likely have to revise our growth outlook for the US economy upward and the risk of an overheating economy that pushes wage growth and consumer price inflation higher could be increasing. Thus, even though there were no new signals in that direction from Powell today, the risk, in our view, is currently tilted toward more rate increases this year than the current Fed median projection of three further increases.


Jes Asmussen

Chief Economist Denmark

Denmark and The Netherlands

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