Economic Outlook Has Improved

The US Dollar strengthened in late trading yesterday in reaction to comments made by new Fed chairman Powell during his first testimony. Perhaps the most market moving comments were those in reference to how the Fed’s economic outlook has developed since the December FOMC. Speaking during the testimony new Fed chairman Powell said “What we’ve seen is incoming data that suggests the strengthening in the economy. We’ve seen continuing strength in the labor market. We’ve seen some data that will, in my case, add some confidence to my view that inflation is moving up to target. We’ve also seen continued strength around the globe, and we’ve seen fiscal policy become more stimulative.”

Powell on Fiscal Stimulus

Further on during his testimony, Powell said that the full extent of recent fiscal stimulus had not been captured in the December SEP forecast or in the discussions at the January meeting as it was after the December meeting that the US tax bill was passed and after the January meeting that the budget agreement was passed. Fiscal policy is widely expected to have a significant boosting affect on growth over the latest half of 2018 and into 2019.

Speaking on this matter, Powell said “…the tax bill was passed about a week and a half after our December meeting and then the spending bill was about a week and a half after our January meeting so in each case we didn’t have the full set of information. I think our view – my personal view would be that there will be a meaningful increment in demand, at least for the next couple of years from the combination of those two things.”

Powell on Unemployment Level

While the majority of the new Fed chair’s comments were positive and helped fuel USD buying, there were some areas where Powell was not quite so positive. Powell noted that the level of unemployment which the Fed deems suitable in line with its mandate of securing “maximum sustainable employment” might be lower than the bank previously thought.   In terms of an actual level, Powell said