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Fed Chair Sticks to Steady Policy Script, Says Watching Virus Risk

Don Curren February 11, 2020

Federal Reserve Chair Jerome Powell reaffirmed the US central bank’s neutral stance in his semi-annual congressional testimony Tuesday, acknowledging that some of the uncertainties relating to global trade have diminished, but also signaling the Fed is watching coronavirus and its economic impact carefully.

In his opening statement to the Committee on Financial Services of the House of Representatives, Powell said the emergence of the 2019-nCoV strain of coronavirus “could lead to disruptions in China that spill over to the rest of the global economy.”

In response to a question about the potential economic impact of the virus during the hearing, Powell said authorities in China are focusing primarily on containing the outbreak, but China’s central bank has taken measures to bolster the economy, and the governments of China and other Asian nations can be expected to take steps to offset its potential economic impacts.

But there was not sufficient concern about the coronavirus or any other risk confronting the economy in evidence in Powell’s statement or his answers to lawmakers to alter market expectations of continued steady policy. Data from the CME Group indicated US interest rate futures markets on Tuesday morning were attaching a 90% probability to the Fed maintaining its target range for the fed funds rate to 1.50% to 1.75% at its next policy date on March 18 and a 10% likelihood of a reduction to 1.25% to 1.50%.

“The (Federal Open Market Committee) believes that the current stance of monetary policy will support continued economic growth, a strong labor market, and inflation returning to the Committee’s symmetric 2% objective,” Powell’s testimony said.

“As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy will likely remain appropriate. Of course, policy is not on a preset course. If developments emerge that cause a material reassessment of our outlook, we would respond accordingly,” it said.

Powell painted a portrait of a fundamentally healthy, resilient economy to the House committee, indicating GDP rose at a moderate rate over the second half of last year. “Growth in consumer spending moderated toward the end of the year following earlier strong increases, but the fundamentals supporting household spending remain solid,” he said.

Asked if volatility in the US repo market reflected underlying economic problems, Powell said there was no indication that was the case, and said the measures taken by the Fed in that regard were effective.

His written testimony indicated the Fed’s purchasing of Treasury bills and its repo operations have been successful in providing an ample supply of reserves to the banking system and effective control of the federal funds rate. “As our bill purchases continue to build reserves toward levels that maintain ample conditions, we intend to gradually transition away from the active use of repo operations.,” it said.

Don Curren
Market Strategist and Content Editor
dcurren@cambridgefx.com
@dbcurren

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