In his appearance in front of the Senate Banking Committee Federal Reserve Chair Jerome Powell was unequivocal in his upbeat assessment of the US economy.
The US jobs market continues to impress with solid job creation, unemployment at an 18 year low and with the potential to fall further, optimism in households has boosted spending, business investment is on the up and the solid pace of growth is also being well supported by the recent tax cuts. This list is impressive.
Bullish on inflation
Even inflation, which had been a problem child in the US over previous years is now well on track, with inflation above the Fed’s target of 2%, lifted by an increase in fuel; but core inflation, which excludes more volatile items such as food and fuel also at the target level is encouraging. The missing piece continues to be average wages which, although are slightly up on last year, are still below what the Fed would expect to be seeing given the tightness in the labour market. Powell considers low productivity to be a key factor keeping wages low, stating that higher productivity could lift wages. However, he was quick to point out that wage growth is still above trend inflation.
Rates to keep on rising
Jerome Powell continued with the Fed’s message to continue raising rates gradually as he sees several years of the jobs market remaining strong and inflation steady around 2%. This was music to the ears of the dollar, providing the greenback a welcome distraction from the trade war noise over recent weeks.
Trade disputes effects hard to predict
Investors were particularly looking for conviction from Powell and that is what they got. Traders wanted to see that the Fed was not flinching with the developing trade tensions. Whilst Powell stated that the impact of trade disputes was hard to predict, his assessment of risks was balanced believing the economy was just as likely to steam ahead as it was to slow down.
Dollar Rallies
Treasury yields inched higher boosting the dollar and the broader US markets pared losses since Jerome Powell took to the stage and delivered his upbeat assessment on the US economy. This proved to be a Fed which is not easily turning dovish, even in the face of growing uncertainty. The overall upbeat tone suggests that the Fed is not about to stop hiking rates over trade issues, which could keep the dollar on a positive trajectory.