Markets Right Now: Stocks waver as Fed chief testifies

Robyn Valdez
March 3, 2018

Federal Reserve chairman Jerome Powell said he sees no signs the USA economy is overheating, and reiterated the central bank will continue to raise rates gradually to keep unemployment and inflation in balance. Australia's S&P/ASX 200 sank 1 percent to 5,914.00.

Fed chief Powell will deliver the second leg of his semi-annual testimony on Thursday, an opportunity to clarify comments made on Tuesday that rekindled speculation over US monetary tightening this year happening faster than expected.

"There's no evidence that the U.S. economy may be overheating", Powell said during a Senate Banking Committee hearing.

Powell replaced Janet Yellen as Fed chairman about three weeks ago and was immediately tested by turmoil in the stock market.

Investors saw something to worry about in Powell's comments about rising inflation: They thought it made it more likely the Fed would increase rates faster. We've seen continuing strength in the labour market.

Inflation has mostly missed the central bank's 2 percent target since 2012, though policymakers expect it to rise toward their goal. "And we've seen fiscal policy become more stimulative".

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Futures markets showed the odds of a fourth rate hike rising in response to Powell's comments.

"We just need to take a deep breath", said Omair Sharif, senior USA economist at Societe Generale in NY.

That drove shares in US steel producers as much as 12 percent higher but knocked 2 percent or more off heavyweights like Boeing and Caterpillar, who investors anxious would face higher raw material costs and trade barriers elsewhere.

The continued suppression of wages has been at the very centre of the profit accumulation process for major United States corporations, and the Fed is particularly sensitive to any signs that a fall in unemployment will lift labour costs. The rosy forecast caused investors to raise the odds the Fed may go further and raise rates four times this year.

The nervousness on the financial markets may have been compounded by news that striking teachers in West Virginia were denouncing a sellout agreement announced Tuesday by teachers' union leaders and planning to defy their call for a return to work on Thursday. A jobless rate of 4.1% is its lowest since 2000 and below what Fed officials view as it's long-term sustainable level.

Further elaborating on the crucial labour market question, the report said that while there was no way to know with precision, "the labour market appears to be near or a little beyond full employment at present".

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In an article headlined "Powell's first problem: Taming the job market", the Wall Street Journal drew attention to these passages in the Fed report.

The new Fed Chief replied: "It seems that the markets were generally orderly throughout nearly all of that time".

Powell has also voiced his opposition to a strict monetary rule but in his testimony he noted that the Fed "routinely consults monetary policy rules" to use as guidelines in setting policy. He said the aim of the changes was to reduce the burden of regulation "without losing any safety and soundness". Meanwhile, Fed's preferred PCE inflation index advanced 0.4% and core was up 0.3% in January.

Powell also said financial conditions remained accommodative despite higher volatility.

"As long as both of these conditions are met, we do not believe that (Powell's) testimony threatens to derail risk appetite, at least not in a sustained way", they told clients.

The Dow Jones industrial average sank 77 points, or 0.3 percent, to 24,954.

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