The Daily Update: Powell's Testimony

Yesterday we had Powell’s first day of Congressional testimony before the Senate Banking Committee, where he continued to emphasize the need for maintaining fiscal stimulus whilst downplaying inflation concerns. His statement was along the same lines of prior comments where he has said officials are in no rush to taper or tighten policy. He reiterated in his prepared remarks ‘We expect that it will be appropriate to maintain the current accommodative target range of the federal funds rate until labour market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time’.

One topic that many market participants were paying particular attention to was that of recent rise in US treasury yields. Over the last few days Fed officials have repeatedly said that they are ‘comfortable’ with the rise in yields since the turn of the year as they have been driven by increased optimism on a post-pandemic, fiscal-enhanced recovery later this year. When Powell was asked directly about recent rising bond yields, he again stated ‘in a way, it's a statement on confidence on the part of markets that we will have a robust and ultimately complete recovery’. However, we believe that there will be a change of tune if real yields start to move higher, which will affect borrowing rates, which has started to happen in some parts of the economy.

Powell was also keen to emphasize that the economic recovery remains patchy at best and that the downturn has not fallen equally, with lower-wage workers, African Americans, Hispanics, and other minority groups being partially hard hit. ‘The economic recovery remains uneven and far from complete, and the path ahead is highly uncertain. As with overall economic activity, the pace of improvement in the labour market has slowed’ he said, adding ‘As discussed in the February Monetary Policy Report, the economic downturn has not fallen equally on all Americans, and those least able to shoulder the burden have been the hardest hit’.