NZ dollar falls as Powell prompts rethink

NZ dollar falls as Powell prompts rethink

The Federal Reserve remains on track to continue increasing interest rates gradually to keep the economy functioning smoothly, Jerome Powell told Congress on Tuesday in his first testimony as Fed chairman.

"Hawkish comments from Powell have fuelled market speculation of the Federal Reserve raising USA interest rates four times this year - ultimately supporting the dollar", said Lukman Otunuga, Research Analyst at FXTM.

"He said it's his impression the economy was getting stronger, which subtly gave the indication that he was going to raise his personal forecast for four rate hikes this year", said Michael O'Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut. It was a continuation of the remarkably smooth rise that investors enjoyed in 2016.

European stocks may open lower on Wednesday after new Fed Chairman Jerome Powell laid out a case for a faster pace of United States interest rate increases, saying that further gradual increases in interest rates would be appropriate to attain objectives of maximum employment and stable consumer prices. Powell, a Republican, has been on the Fed's seven-member board since 2012. His remarks on rate hikes and inflation were deemed a continuation of his predecessor' s approach of "cautious hawkishness", which strengthened the dollar and pressured the gold prices. Unemployment is at its lowest rate since the early 2000s.

"Market expectations of higher US rates could intensify further if the new Fed head doubles down on hawkish comments".

Powell would not say whether the Fed's projection for rate increases would change, but he noted a number of ways that the economic outlook has improved since December, including stronger data on growth and inflation, the passage of a US$1.5 trillion tax cut in late December past year and an increase in government spending in a January budget deal.

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In prepared remarks, Powell said: "Some of the headwinds the USA economy faced in previous years have turned into tailwinds", noting stimulative fiscal policy and firm demand for U.S. exports. Signs of better wage growth and inflation made him more confident about the economy, he said. While concerns over higher interest rates continue to put markets on edge, economic data will also be keeping investors busy Thursday.

In the interim, the Fed has seen continuing strength in the labor market, data that suggest inflation is moving toward its target, more stimulative fiscal policy, and continued economic strength around the globe, Powell said. "In this environment, we anticipate that inflation on a 12-month basis will move up this year and stabilize around the FOMC's 2% objective over the medium term".

The Fed chairman hinted that the central bank would stick to its current path of gradual rate hikes, but his comments during congressional testimony seemed to spook the market.

Yellen often received a rough reception from Republicans in the House who believed the Fed, through the extraordinary measures it used to combat the 2008 financial crisis and the deep recession that followed, had grown too powerful and too independent.

The Federal Reserve uses its discount rate as sort of a brake pedal on the economy.