Fed's Chair Testimony: What Could Be Read Between the Lines?

In course with the hearings in the US Congress yesterday, the President of the United States tweeted: "When Jerome Powell started his testimony today, the Dow was up 125, & heading higher. As he spoke it drifted steadily downward, as usual, and is now at -15. Germany & other countries get paid to borrow money. We are more prime, but Fed Rate is too high, Dollar tough on exports."

This response represents one of the popular and possible estimates of Mr Powell's speech. But if the direct immediate effect is to be considered, then it would also be fair to associate a partial rise in stock indexes during the couple of hours before the testimony and even during the 24-hours that led up to it, with certain expectations, and the atmosphere surrounding the Federal Reserve's (Fed) Chairman's figure and his speech.

One way or another, there were still no global changes in the global stocks sentiment or in the US Dollar market positioning over the last two days. Perhaps Jerome Powell was able to state the reason clearly enough this time as to why he and his colleagues reserve an opportunity of easing monetary policy for later. "Taking a longer view, there has been a decline over the past quarter-century in the level of interest rates consistent with stable prices and the economy operating at its full potential. This low interest rate environment may limit the ability of central banks to reduce policy interest rates enough to support the economy during a downturn," Fed's Chairman said in the testimony.

This excerpt from Mr Powell's report could say a lot, especially in combination with the very beginning of the speech, where he said: "The economic expansion is well into its 11th year, and it is the longest on record". While going on to discuss the positive side of the US economic cycle now, he obviously keeps in mind what will happen in the future when this cycle will inevitably go down, sooner or later.

Although Mr Chairman mentioned that the unemployment rate has been near half-century lows for more than a year, and that new job openings remain plentiful, he didn't avoid talking about some really weak points that also exist in the labour market. As he said, employers are increasingly willing to hire workers with fewer skills and train them. As a result, the benefits of a strong labour market have become more widely shared. People who live and work in low- and middle-income communities are finding new opportunities, but as a result, wages rise slows and mostly shifted to the lower-paid jobs. Again, "labour force participation by individuals in their prime working years is at its highest rate in more than a decade". However, Mr Powell added, "it remains lower than in most other advanced economies, and there are troubling labour market disparities across racial and ethnic groups and across regions of the country." He also remarked that productivity gains have been "subpar throughout this economic expansion".

As for the signs for further monetary decisions - what is usually most interesting for the markets - there was an absence of any strong clear message so, right now, everyone is inclined to see something different in the words of Jerome Powell, just like they would see in a blot from the Rorschach test. For those who might be prepared to read between the lines, a lack of some hints may point towards preparations that are already in motion, or it could be an indicator for the Fed to refer to in the course of the year, if they see fit to justify any additional policy easing. Those reasons may arise amid rather weak business investments and exports as well as industry production in the second half of the 2019 that is "largely reflecting sluggish growth abroad and trade developments."

Moreover, Jerome Powell added: "Those same factors weighed on activity at the nation's factories, whose output declined over the first half of 2019 and has been little changed, on net, since then. Some of the uncertainties around trade have diminished recently, but risks to the outlook remain. In particular, we are closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy." Mr Powell continued to talk about the coronavirus during the questions session in the US Congress by saying that the coronavirus would make just "some effect" on the economy of China or its Asian and European partners, and then probably an indirect effect to the US economy. He accented the human aspects of the tragedy on many people lives, and that it would be a wrong "temptation to speculate" now on the other aspects of the virus.

From this perspective, it could be assumed that the Fed is concerned with other risks to the global economy growth, including trading aspects from which Powell's team is trying to secure a necessary room for further possible steps, if outer economic conditions deteriorate. He said, the Fed will monitor these trends and the whole outer situation developments. Nevertheless, the Fed could always refer to possible trade tensions from outside or to the insufficient core consumer inflation (PCE) levels within the country that is now at 1.6% only and still below the Fed symmetric two % target. Mr Powell said he expects the inflation "to move closer to the target in coming months". But, if the inflation would not make it then nothing will prevent the Fed from lowering interest rates once or twice for a need to extend the current economic growth cycle.

All these considerations may leave plenty of room for measures to change, like more interest rate cut before the end of the year. If such an opportunity would turn to a reality, that may lead to a weaker US Dollar and this may help the country to service its debt. That would also be the reason for further pumping of money into the stock markets, despite Jerome Powell's deliberations of possible limits on inflating the Fed's ample balance sheet and that the Fed's assets purchasing program could be minimised in the middle of this year.

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