Wall Street seen recovering from Powells mildly more hawkish tone

In his first appearance before Congress, Jerome Powell, new chair of the Federal Reserve painted an optimistic picture of the US economy. 

In his comments to the House Financial Services Committee Powell highlighted strength in the jobs market and strong business investment as reasons to remain optimistic about the outlook of the economy and confirmed that the Fed would continue to bolster strong growth  

However, in a showing of his many years of experience on the Fed panel and as a nod to his intention to continue along a similar path to Janet Yellen, Powell was careful not to overstate his bullishness towards the US economy, reminding that US inflation was still falling short of the central bank’s 2% target.  

He emphasized that the Fed “will continue to strike a balance between avoiding an overheating economy” and allowing inflation to tick higher towards the 2% target. He went on that further gradual increases in the federal funds rate will best promote attainment of both of our objectives. 

Powell has, in a subtle manner, laid out the possibility of further rate hikes. He clearly was never going to discuss 3 hikes or 4 at this meeting in any layman’s terms, especially given that he still hasn’t Chaired is first FOMC meeting. 

Powell was walking on a fine line, given the backdrop of the market turmoil over fears of a steeper rate hikes path but appeared to strike a the right balance. 

Market reaction: 

Following his appearance US treasury yields jumped higher to 2.9 as concerns over more aggressive hiking from the Fed took hold. The jump in treasury yields supported a rally in the dollar, which broke through 89.86 to 90.50 Meanwhile, consistent with previous sessions, the high yields weighed on the US equity indices which sold off. 

So whilst the reaction was that of a market which is expecting a mildly more hawkish Fed Chair, the reaction was also fairly tame in comparison to what we have seen earlier in the month. 

Treasury yields didn’t even reach the recent 4 year high, the dollar has fallen from its daily peak, rebounding off resistance at 90.50 and the US equities are paring losses with the Dow Jones almost flat on the day - a mild reaction compared to other sessions. 

This tame reaction suggests that market fears have subsided quite substantially from earlier in the month. Fundamentals remain strong, Powell has put in a solid, optimistic but not overly hawkish first appearance and there appears little reason to fear gradual rate hikes going forward.