Monday, 18 March, 2019

Dollar reels from Fed's chief remark

'No' Jerome Powell won't resign US Fed chief boosts markets claiming policymakers are 'listening' to market fears, despite strong jobs data
Ben Pena | 07 January, 2019, 04:41

Fed watchers have said that the bar is very high for the president to remove Powell "for cause" as the law appears to require, provided Powell decides to fight the dismissal in court.

Powell stressed Fed officials are patient and keeping a close eye on the voices of financial market, calling Fed policy as flexible and clung to real-time economic developments.

Powell's willingness to be flexible on interest rates was welcome news to investors, many of whom anxious that Fed chair risked cutting off the current economic expansion by continuing to raise interest rates despite signs the US economy was cooling off a little.

It wasn't just the Fed chairman's observations about the potential for rate hikes in 2019 that had investors buying, but assurances about Powell's job security in the face of increasing pressure from President Trump. "With the muted inflation readings we have seen coming in, we will be patient as we watch to see how the economy evolves".

The main catalysts for the surge were the monthly USA payrolls report, which blew past economists' forecasts with the largest number of jobs created in 10 months, and comments by the Fed's Powell.

Since mid-December, investors have been expressing disagreement with Powell's assessment of the economy, saying the Fed had it all wrong and that the economy was weakening. Since then, the Federal Reserve chairman has received several reasons to temper his assessment.

Powell gave as an example the fact that in 2016, when Janet Yellen was Fed chair, the central bank began the year with a projection that it would raise rates four times that year but ended up raising rates only once because the economy hit a soft-patch.

"No", the Fed chief replied succinctly. Most of the companies in those industries stand to do better in times of faster economic growth.

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Compared to comments he made after the Fed raised rates last month, "it's not that he's changed his message. but that he explained it more patiently and in greater detail", said Lou Brien, market strategist at DRW Trading in Chicago. Earlier in the day, the euro zone single currency fell as low as $1.1347 against the dollar after the dollar rose following data that showed USA employers hired the most workers in 10 months in December while boosting wages.

President Trump and Democratic leaders failed to strike a deal on Friday to end a partial shutdown of the U.S. government as they fought over Trump's request for $5 billion to fund a wall on the border with Mexico lawmakers said. "There aren't signs of significant economic weakness".

Powell said he did not think the latter was having much impact on markets, but that the strategy would be changed if it started interfering with the bank's broader goals of maintaining strong employment and stable inflation.

Speaking after months of volatility in world bond and stock markets, Powell avoided some of the communication missteps that in the past have roiled rather than calmed investors.

But Jason Schenker of Prestige Economics suggested the Fed could still take a hard line.

The Fed's tightening cycle includes both rate hikes and the gradual shedding of its more than $4 trillion in assets.

"The markets are pricing in downside risks. and they are obviously well ahead of the data, particularly if you look at this morning's labour market data", Powell added.

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