Federal Reserve Chairman Jerome Powell on Friday moved to mollify financial markets concerned about a US economic slowdown, saying that while momentum is solid, US central bank will be sensitive to downside risks market is pricing in.Powell also said he would not quit if asked to resign by President Donald Trump, who has repeatedly chastised Fed for its interest rate hikes.Market reaction:Stocks: Major indexes are at days high, up between 2.7 per cent and 3.5 per centBonds: 2 and 10-year Treasury yields jump to session highs, fully retracting previous sessions big declines; 2s last at 2.48 pct, 10s at 2.65 pctForex: The dollar index gives back all of its gains from payrolls report, with greenback weaker against both euro and yenRate futures: Fed funds contract for January 2020 drop further, retracing about two-thirds of previous days gainsComments:Peter Cecchini, Managing Director and Chief Market Strategist, Cantor Fitzgerald, New York:My thought around recent press conference Fed had was that Fed communication was bumbled and that chairman had to walk back his overly hawkish tone and thats exactly what he did today.Introducing word flexibility to rate hikes and to balance sheet took away a lot of uncertainty that he had created for risk assets.
With balance sheet reduction on autopilot, he made it sound as if they on course to do a certain thing and that they werent going to pay attention to financial markets.And I think he introduced enough new nuance into his statement today to assure market participants that theyre going to be a bit more flexible than had previously been perceived.James Athey, Senior Investment Manager, Aberdeen Standard Investments, London:The biggest concern was idea that balance sheet unwinding was being done on autopilot, which sounds scary to market.
Powell just softened that notion a little.Hes saying right things: that Fed is prepared to shift, that its listening carefully, that its sensitive to messages market is sending but hes not shouting fire in a crowded theater.
He told market, yes, of course were not going to become part of problem instead of part of solution, but he underscored that Fed is engaging in tightening policy because economy is doing well.
Its a good message for market that is starting to consume itself out of fear.Robert Pavlik, Chief Investment Strategist and Senior Portfolio Manager, Slatestone Wealth LLC, New York:The fact that he said that he said that Fed is going to be patient and flexible with rate hikes, leads markets to believe that indication of two rate hikes in 2019 may not come to fruition and we may see at most one or no rate hikes and that means markets are feeling better that Fed is not strangling overall economy and perhaps forcing it into a recession and that removes a monetary policy concern that has been hanging over market for past few months.If Fed does not bring us any closer to a slowdown by raising interest rates, then you can extrapolate that into positive things for global economy.A further Fed rate hike would slowdown economy to point where no one is looking for a loan, no one is going to be looking to borrow money during a recession so it impacts banks more with additional rate hikes despite fact that higher rates mean a better net interest margin environment for financials.Jim Vogel, Interest Rates Strategist, FTN Financial, Memphis, Tennessee:Its certainly close to what market wanted to hear.
The Fed needs to rebuild market confidence in its communications and today is first great step.
Markets also appreciated Powells emphatic response to Washingtons critical comments about him.Alfonso Esparza, Senior Currency Analyst, Oanda, Toronto:Powell talked about jobs data, which was strong, but he also acknowledged that data has been mixed in States.The gist of his speech was about what central bank is expected to do and not expected to do.
He mentioned that there is no pre-set path.
Basically getting back to being data- dependent, politics aside, geopolitics aside, unless they start affecting data.He meant well but I think he was not able to turn whole narrative on its head on whats going to happen with Fed in 2019.
Two rates hikes were expected two or three weeks ago and now it would not be a total shock if there is a rate cut this year.I think he was not as forceful as some people, myself included, expected him to be.
That is what took a bit of wind out of sails of dollar, especially after a somewhat solid NFP report.Chuck Carlson, Chief Executive Officer, Horizon Investment Services, Hammond, Indiana:A big issue that has been impacting investor psyche concerning market has been trying to calibrate economy and what kind of slowdown is going to occur, and concern about an economic slowdown as well as a potential earnings recession because of that economic slowdown.Today they got some data points that would indicate from a jobs standpoint things are still pretty solid.
And there seem to be maybe more impressions from Fed about how aggressive theyre going to be to raise interest rates in 2019 or at least how theyre going to view decision to raise interest rates or not that seemed a bit more palatable for Wall Street.Eric Viloria, FX Strategist, Credit Agricole, New York:Powells comments that Fed is prepared to alter policy expectations quickly and flexibly are weighing on USD and giving risk sentiment a boost.
He cited 2015/2016 period when developments outside of US delayed rate normalization plans.
Overall, Powells tone is cautious which is contributing to USD softness.Juan Perez, Senior Currency Trader at Tempus INC, IN Washington:Thursday was somber, too dark, everyone panicked almost overwhelmed by bad news on all business and trade fronts.
Now, we go back to measured and moderate tones from our leaders, Fed chairs all sitting together and saying Hey! Market! We hear your concern on downside risks, but relax, 2018 was overall a good economic year, things might just moderate.
That tone, that message, eased market concerns and we are glad to see that.
It goes along with our dollar narrative that indeed dollar can afford to shed some value.
On Trump question and Fed independence, Id say they all took a vow in unison to protect their agency/institution.
Trump might have other things to worry about and focus wont be as much on Powells tenure.Thomas Simons, Money Market Economist, Jefferies Co, New York:I think that there were two things that Powell really needed to do with speech today.
It was important to address threats to Feds independence coming from administration.
I think he did that very effectively He said theyre going to do what they believe is appropriate regardless of input from anyone else.To that end I think it was very important that he clarified a point they attempted to send in Dec 19 policy statement.
Which is that if you look at summary of economic projections, dots suggest a lower trajectory of rate hikes for 2019.But market and a lot of commenters in media were focused on fact that they had raised rates though there had been weaker inflation and weaker stocks going into that meeting.
I think that lead to inappropriate expectations that Fed would blindly continue to raise rates in face of weakening economic conditions.
He was effective in saying today that would not be case.And most importantly, acknowledging fact that inflation has fallen a little short of dual mandate expectations is almost a back door signal that theyre going to be slowing rate hikes in near future.Tom DI Galoma, Managing Director, Seaport Global Holdings, New York:Powells statement that Fed is always prepared to shift stance of policy is truly defining moment for equity market bounce.
There is great relief that Powell has pulled back on his hawkish rhetoric and is a bit more conciliatory.
He is a more flexible in his views and this in turn has taken pressure off equity markets generally.Bob Smith, President, Sage Advisory Services Ltd, Austin:It doesnt change anything to sit there and say Im flexible and were going to be flexible.
What world is trying to figure out is what does that mean if youre going to talk about it in terms of rates thats one thing.
If youre going to talk about it in terms of leverage and unwinding balance sheet thats another thing and important thing.Weve been in position of fading rallies.
Were still very suspect.
Were cautious.Lou Brien, Market Strategist, DRW Trading, Chicago:Its not that hes changed his message from FOMC, but that he explained it more patiently and in greater detail.In FOMC statement and in post meeting press conference he thought it was sufficient just to say that a couple of changes in statement was enough to indicate uncertainty on future path of funds rate and really it was not taken that way.It was really I think a miscommunication.
And I think it was a series of miscommunications that hed had since early October.
And so I thought it was interesting that he came out with, not a prepared statement, but what appeared to be several cheat sheets to ensure that he hit points that he wanted to and didnt miss any in a way that he had prepared, so that message he was sending would be more clearly heard.This is better than having an uncertain economy and a Fed that was interpreted as leaning hawkish.
But I dont know if it sufficient just because he was able to put pen to paper and say stuff that he meant to say in December.Randy Frederick, Vice President Of Trading And Derivatives For Charles Schwab In Austin, Texas:His (Powells) comments are being interpreted as dovish.
The things he said today, are leading traders, investors to believe that Fed is willing to potentially change their projections for rate hikes this year.What we have seen in past is that markets seem to be dictating Feds next moves and that is how markets are looking at it right now.At moment, (stock) markets are interpreting speech in a way that it reduces likelihood of future interest rate hikes.
What did change was probability of a rate cut happening this year which was also something markets had been pricing in, which dropped to 30 per cent from 50 per cent.
This shows that markets want to move towards a neutral rate.Jack Ablin, Chief Investment Officer, Cresset Wealth Advisors, Chicago:Thats just reiterating law he lay down in December.
The inference is that hes not going to come to rescue of market either because he doesnt want to or because Fed doesnt have wherewithal.News of trade talk with China was welcome and a powerful jobs report provided a double shot of espresso to market to wake up investors today.
Investor sentiment has been in cellar so anything thats slightly positive would be viewed as good news.