Powell Testifies

US equities were shunted lower yesterday in response to comments made by chairman of the Federal Reserve, Jerome Powell. Testifying before the Senate Banking Committee as part of the Fed’s semi-annual monetary policy report, Powell told the committee that the central bank has “hope for a return to more normal conditions” this year.

Treasury Yields Rally Causing Concern

Powell’s testimony, which continues today, has drawn plenty of attention from the market given the sharp increase we’ve seen of late in US treasury yields. With US inflation expectations rising, driven by optimism around the successes of the vaccination push, traders were looking for clues as to how the Fed will respond to the current dynamic. However, Powell was keen to reaffirm the Fed’s commitment to maintain monetary policy easing to help bolster the US economic recovery.

Cautiously Optimistic

Despite the commitment to maintaining easing, Powell’s assessment and outlook was broadly optimistic. Citing the success of the vaccination program, Powell said: “In recent weeks, the number of new cases and hospitalisations has been falling, and ongoing vaccinations offer hope for a return to more normal conditions later this year.” However, the Fed chairman was clear in his warning that risks remain, adding the Fed’s view that “the economic recovery remains uneven and far from complete, and the path ahead is highly uncertain.”

Inflation Expectations Discussed

One of the main focus points for markets in the lead up to this event has been the rise in inflation expectations. With economists and market players across the board upgrading their 2021 US economic forecasts in light of the vaccine progress, there has been a lot of debate over whether the Fed will be forced to scale out of easing sooner than expected if inflation spikes.

Powell Focusing On Employment

Various Fed members have downplayed these fears and Powell once again made an effort to push back against this view, saying: “The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.” Powell was also keen to point out the almost 10 million US citizens currently unemployed, saying that the Fed would not be raising interest rates from current levels until it had achieved a return to full employment, and advised that: We will continue to clearly communicate our assessment of progress toward our goals well in advance of any change in the pace of purchases.”

Equities Recover Losses

In all, it was a very balanced set of comments from the Fed chair. Powell’s initial comments regarding a return to normal conditions saw equities selling off initially though they recovered over the course of his testimony as the Fed chair pushed back against the idea of abandoning monetary easing earlier than expected.

Technical Views

S&P500

The sell-off in the S&P yesterday saw price breaking below the 3868.25 level briefly before recovering to trade back above the level. With the rising trend line and 3714.50 offering support also, the bias remains in favour of further upside from here targeting a breakout to new highs.

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