Fed chief's rate talk puts stocks in bind

Reuters

Federal Reserve Chairman Jerome Powell, pledging to "strike a balance" between the risk of an overheating economy and the need to keep growth on track, told US lawmakers on Tuesday that the central bank would stick with gradual interest rate increases despite the added stimulus of tax cuts and government spending. We need to see a move back above 1.3980 to stabilise. We've seen some data that will, in my case, add some confidence to my view that inflation is moving up to target.

The dollar fell to two-week lows against the yen and dropped from seven-week highs versus the euro on Thursday on fears of an imminent trade war after President Donald Trump said the United States would impose tariffs on steel and aluminum.

Powell said that when it came to projecting future rate increases at the Fed's upcoming March meeting, at which a quarter percentage point rise is nearly certain to be announced, he and other members of the Open Market Committee would be "taking into account everything that's happened since December".

The economy grew at a 3 per cent annual pace over the second half of past year, and it is about to receive additional stimulus from tax cuts and higher federal spending approved by Congress in recent months.

"If you were to go to four, 25-basis-point rate hikes I think it would still be gradual", Dudley said, according to a Reuters report.

CURRENCIES: The dollar dipped to 106.87 yen from 107.18 yen late Wednesday.

He said the Fed was in a "process of discovering" how low unemployment could fall before inflation took hold.

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The Fed can at any time change the key interest rate that sets everything from mortgages to auto loans, but in recent years it has only done so at one of the four policy meetings that includes a press conference by the Fed chief, like the one in March.

In response to the Great Recession and a weak economic recovery, the Fed embarked on three rounds of large-scale purchases of Treasurys and mortgage bonds to keep long-term interest rates low to spur investment and consumption.

As we learned last month (and on Tuesday), "it's all fun and games" when it comes to inflation and rate rise "until someone gets hurt", where "hurt" means the stock-bond return correlation flips positive and everything sells off at once. The downward revision to GDP growth matched economist estimates.

For the most part, in his prepared remarks Powell struck all the right notes. Regulations on smaller banks would also be lessened.

The momentum hit a wall at the start of February when a government report showed that workers' wages grew more strongly than expected in January, which sparked worries about rising inflation and a more aggressive Federal Reserve.

The beginning of his tenure has been defined by ramped up market volatility, a pickup in rates and the consensus that inflation is ticking higher after a prolonged period of price suppression. For that reason, he said, the Fed does not feel it needs to speed up the pace of benchmark policy rate increases. With Powell's testimony fuelling market speculation of higher U.S. interest rates this year, stock markets remain exposed to downside risks as equity bears lurk in the background. Thursday, however, the Dow was down 96.08 points at 24,933.12. "In addition, growth in business investment stepped up sharply previous year, which should support higher productivity growth in time". "That's unknown and the market hates uncertainty", Orlando said.

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