Wednesday, 23 October, 2019

NZ dollar rides higher on Powell's dovish testimony

Gold and Metals Rally as Fed's Powell Hints a Rate Cut in July Gold and Metals Rally as Fed’s Powell Hints a Rate Cut in July
Jean Garcia | 12 July, 2019, 05:28

The Fed has raised rates nine times since 2015, four increases coming under Powell's leadership.

Earlier rounds of U.S. tariffs on trading partners - including China - had been dismissed as of little macroeconomic importance, with the Fed in early May still anticipating its policy rate would remain unchanged for the rest of the year. Meanwhile, inflation has fallen farther from the Fed's target.

The only question left seems to be: How low will borrowing costs go this month? It's a prospect that has delighted investors, who have lifted stock indexes to record highs.

At the same time, price measures watched closely by the Fed continue to run well below its 2 percent target, while wage gains so far are barely enough to cover inflation, he said, rejecting the claim the USA is experiencing a "hot" jobs market.

"If you got a call from the President, today or tomorrow, and he said 'I'm firing you, pack up, ' what would you do?" The Fed had justified its four rate hikes in 2018 in part by arguing that robust hiring would eventually ignite inflation. Businesses, in turn, would raise prices to offset the cost of higher wages.

Investors will also be keeping a close eye on USA consumer price index data for June, due tonight. But the Fed has reasons to worry when inflation stays consistently below its target level. Why spend or pay more now if prices aren't likely to rise and might even fall? In his testimony Wednesday, Powell seemed to suggest that assumption is on the mark. The market read his comments to mean that an interest rate cut could come at the end of the month.

Melvin Gordon: 3 Potential trade partners for Los Angeles Chargers
Trading star players is hardly unprecedented, but trading a running back of Gordon's caliber in his prime would be. This is likely a small ripple in the AFC West pond given that the Chargers would be foolish to let Gordon walk.

Powell emphasized trade tensions and concerns over the strength of the global economy in his half-yearly testimony before the US House Financial Services Committee.

US underlying inflation rose at the highest rate in almost 1-1/2 years in June, possibly easing some of the pressure on the Federal Reserve to take aggressive monetary action.

As recently as a May 1 news conference, Powell had characterized lower inflation since the start of the year as merely "transitory", blaming trends such as a drop in clothing prices.

The firmer inflation readings follow Fed Chairman Jerome Powell's testimony to lawmakers Wednesday that there's "a risk that weak inflation will be even more persistent than we now anticipate". "However, inflation has been running below the FOMC symmetric two-percent objective, and crosscurrents, such as trade tensions and concerns about global growth, have been weighing on economic activity and the outlook".

Trump frequently criticizes the Federal Reserve both publicly and in Twitter posts, claiming they need to lower interest rates. And by some measures, the USA workforce is, on average, less efficient: Growth in productivity, which measures output per hour worked, has remained notoriously weak during the expansion. The common currency is also benefiting from slightly higher revisions with German EU-harmonized inflation readings.

The Fed has kept its current benchmark overnight interest rate in a range of between 2.25 percent and 2.50 percent since December.

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