Fed’s Powell tamps down taper talk but feels inflation heat on the Hill

(Reuters) – Federal Reserve Chair Jerome Powell on Wednesday pledged “powerful support” to complete the U.S. economic recovery from the coronavirus pandemic, but faced sharp questions from Republican lawmakers concerned about recent spikes in inflation.

In testimony to the U.S. House of Representatives Financial Services Committee, Powell said he is confident recent price hikes are associated with the country’s post-pandemic reopening and will fade, and that the Fed should stay focused on getting as many people back to work as possible.

Story:

STOCKS: The S&P 500 was up 0.11%, holding firm during Powell’s testimony

BONDS: The 10-year U.S. Treasury note yield slipped to 1.3559%; 2s were at 0.227% after slipping earlier on the release of Powell’s prepared remarks

FOREX: The U.S. dollar index was little changed down 0.46%

COMMENTS:

RANDY FREDERICK, VICE PRESIDENT OF TRADING AND DERIVATIVES FOR CHARLES SCHWAB IN AUSTIN, TEXAS

“Everybody is kind of expecting some sort of language at the Jackson Hole summit that might hint towards when the tapering is going to begin but I don’t believe he is going to tip his hand before that.”

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

“Nothing really changes in policy. He continued with the rhetoric that inflation will subside and the economy – specifically employment – is nowhere near pre-pandemic levels. So nothing earth-shattering from this testimony.

“Most of the questions were regarding inflation, and he continued to say that ‘yes inflation is here and it’s going to stay elevated’ but still feels its transitory and the market is reacting accordingly.

“Bottom line, he continues to say what the market wants to hear. He was as dovish as ever.

“Inflation topped the discussion but again he remains confident that inflation will subside. I don’t share that view, but that’s what the market wants to hear. We’ll probably see yields work their way to the lows of the week.”

LOU BRIEN, MARKET STRATEGIST, DRW TRADING, CHICAGO

“As far as the inflation data goes, I think that there’s enough that a large percentage of the inflation data is coming from things which Powell has said should be transitory. And although there was anticipation that we were going to get a bump up in inflation, and that this is higher than that bump up, I still think that Powell will wait it out, and I think he reinforced that today. I think he probably thought he needed to.”

“The long-end (in Treasuries) is the dog that is not barking. Not only has the Fed changed the way that it’s going to address inflation, but we’ve had a big bump up in inflation to boot and yet the yields remain historically low…The long-end is saying …that inflation is going to not persist and overall over the longer run growth will settle back into the trend it was in. If there was ever the opportunity for the 10-year to get a pass to say let’s start going higher in yield this is it and it’s not happening, and it’s not happening in light of two surprisingly strong inflation reports and a poor 30-year auction.”

ROBERT PAVLIK, SENIOR PORTFOLIO MANAGER, DAKOTA WEALTH, FAIRFIELD, CONNECTICUT

“It’s really all about congress trying to make their point heard. There were very few direct questions to Powell. Regarding inflation, I thought some questions regarding when he might be worried about inflation were valid.

“His statement stuck to his script; that they will keep interest rates low, that they’re watching the economy, and inflation is transitory. And temporary inflation pressures will even out when the supply chain catches up with demand.

“There’s been some differentiation between that statement and the market today. When you get a PPI as hot as it was and CPI yesterday, it starts to shake people’s confidence that inflation is temporary. That’s why we’re seeing a mixed bag today.”

PAUL NOLTE, PORTFOLIO MANAGER, KINGSVIEW INVESTMENT MANAGEMENT, CHICAGO:

“To his credit, he has stuck to script for the last year. We’re going to be accommodative, we’re going to let inflation run hot, there’s no reason to begin tapering at this point. He has said that repeatedly. The financial markets have been calling his bluff, but he is back out there saying ‘nope.’ So the equity market has popped a little bit higher.”

GUY LEBAS, CHIEF FIXED INCOME STRATEGIST, JANNEY CAPITAL MANAGEMENT, PHILADELPHIA

“There really wasn’t much new there. He seemed to reassure the market that the average inflation targeting program was still firmly in place, that there is no imminent expectation the Fed will reduce accommodation. And he answered a lot, and didn’t answer even more of the usual questions from House representatives.”

“(Treasuries) have been in rally mode all day, taking back yesterday’s losses from the 30-year auction. There really wasn’t anything that stuck out from Powell’s comments that moved the market that materially.”

MARVIN LOH, SENIOR GLOBAL MARKETS STRATEGIST, STATE STREET, BOSTON

“Powell maintained the dovish message, kind of pushing back against any concerns that he would change is tune or the more patient approach that he’s been talking about, after the above expectation inflation release. I think that kind of continues to be an overhang. Certainly it seems that, for the moment, the Chairman, and by default the Fed, is looking at kind of this as just one data point, which is part of the transitory story that’s out there. It certainly was a surprise CPI print but everything I’ve read in the opening statement as well as everything I’ve heard from the Chairman is that they are still on this path to slowly taper asset purchases before they even start to consider rate hikes, so we’re still a couple of years away from that tightening, based on everything that we’ve heard today.

“And the dollar ultimately responded that way. Equities have been up and down, but certainly not the volatility that we saw a couple of days ago, which kind of took away maybe that safety bid for the dollar to a certain degree, but I think it was for the most part, the Fed continues to sound overall dovish at this point in the discussion.”

BEN JEFFERY, U.S. RATES STRATEGIST, BMO CAPITAL MARKETS, NEW YORK (via email)

“Powell’s testimony was on the dovish side and the Treasury curve has steepened slightly in response, although we will look for clarity at this Q+A on Capitol Hill this afternoon.”

ROBERTO PERLI, HEAD OF GLOBAL POLICY RESEARCH, CORNERSTONE MACRO, WASHINGTON (via email)

“The testimony conveys a stay-the-course attitude. This is not very surprising because testimonies are rarely the preferred venues to convey policy shifts and because the FOMC hasn’t had a chance to discuss recent events, including yesterday’s CPI print. The press conference following the July meeting should be much more informative about the future course of Fed policy. “