Fed chairs Powell’s testimony ends. Stocks up. Yields down and USD lower.

Fed Chair Powell’s Testimony Summary:

Economic Outlook and Policy Rate Adjustments

  • The Federal Reserve does not foresee reducing the policy rate until there is greater confidence that inflation is moving sustainably toward the 2% target.
  • A possible dial-back of policy restraint could occur later this year, with the policy rate likely at its peak for this cycle due to uncertain economic outlook and unassured progress toward 2% inflation.
  • Incoming data, evolving outlook, and risk balance will be closely assessed, acknowledging risks of adjusting rates too early/fast or too late/little.
  • Notable progress has been made toward the Fed’s dual mandate over the past year, with inflation easing substantially despite being above 2%.

Rates and Inflation Confidence

  • The Fed seeks more data to gain confidence in controlling inflation, emphasizing the importance of a cautious approach given the economy’s strength and tight labor market.
  • There’s an anticipation that housing services inflation will decline.

Capital Rules and Basel 3

  • No decisions have been made on proposed capital rules, but significant changes to the Basel 3 proposal are expected.
  • The Fed is in the initial stages of deciding its approach to Basel 3, considering the feedback received, which has been unprecedentedly voluminous.

Economic Growth and Risk of Recession

  • Continued solid growth is observed, with no significant near-term recession risks identified.
  • The labor market remains tight and strong, supporting the pursuit of a soft landing to maintain economic growth and progress on inflation.

Commercial Real Estate and Banking Sector

  • Commercial real estate risks are deemed manageable, with ongoing efforts to ensure banks can handle potential losses, which could persist as a challenge for several years.
  • Banks with high concentrations in commercial real estate are expected to face losses, emphasizing the seriousness of the issue in certain locations.

Future Rate Adjustments and Economic Developments

  • If the economy evolves as hoped, significant rate reductions could be expected in the coming years, contingent on witnessing more favorable inflation readings.
  • The Fed is prepared for potential surprises in the economy’s next chapter, indicating a readiness to adapt policy in response to unforeseen developments.

Technology and Labor Force

  • A focus on AI’s implications for the economy and labor market, with its potential to either augment or replace labor, remains a point of attention.
  • Immigration and labor force participation have been key contributors to strong economic growth in 2023, with optimism for sustained productivity gains.

In summary, Fed Chair Powell’s testimony highlighted a cautious yet optimistic outlook on the economy, emphasizing data-driven policy decisions, the management of inflation towards a 2% target, and the adaptability to evolving economic conditions and challenges such as commercial real estate risks and the impact of technological advancements.

At the conclusion of his testimony:

  • Dow was up 178.58 points or 0.46%
  • S&P index was up 41.30 points or 0.81%
  • NASDAQ index was up 156.28 points or 0.98%

In the US debt market:

  • 2-year yield 4.536%, -1.5 basis points
  • 5-year yield 4.099%, -3.9 basis points
  • 10-year yield 4.098%, -3.9 basis points
  • 30-year yield 4.244%, -3.0 basis points

This article was written by Greg Michalowski at www.forexlive.com. Source