What to make of US Fed chairman Jerome Powell's hawkish testimony

Jerome H Powell, the newly minted Chairman of the US Federal Reserve (US Fed) came out as a clear hawk in his first testimony before the Congress on Tuesday.

 

Powell said that his expectations for domestic economic growth have increased since the beginning of the year, citing the passage of the $1.5 trillion tax cut, lifting of the debt ceiling and stronger global growth.

 

Our take on his testimony:

 

1.   Clearly hawkish

 

His talons became visible when he answered a Democrat’s question as to what would cause the US Fed to hike more than three times that the central bank’s guidance currently calls for?

 

Powell said that each of the Federal Open Market Committee (FOMC) member would take the developments since the December meeting into account and write down ‘new rate paths as we go into the March meeting, and I wouldn’t want to prejudge that.’

 

2.   Personal views take front seat

 

When the Fed Chair testifies, he speaks for the Federal Reserve, not for himself. But, Powell gave his personal views many times. This is a big break from the past like Janet Yellen, Ben Bernanke or Alan Greenspan.

 

3.   Why is he doing so?

 

By voicing personal views publicly and that too several times, he is sending a message to the other voting members of the FOMC to align their views more to his.

 

4.   Deviation from the Policy

 

The Fed Chairman has not stuck to the semi-annual monetary policy communique to the Congress and has sounded more hawkish than assumed. This has roiled the markets in the US and will do the damage in India as well.

 

5.   Chance to make amends

 

Powell has another chance to make amends if Tuesday's testimony to the Congress was a faux pas. On Thursday, he is scheduled to testify before the Senate Banking Committee.

 

Implications for Indian markets

 

Ahead of the testimony we had advised investors to protect their profits, as positives of the policy were already discounted, where as if the testimony did not go as expected, these profits could vanish.

 

The Nifty after making a series of higher lows has also made a higher high on Tuesday. Despite the lower close this jinx has been broken. The next meaningful support is more than 100 points further lower at 10,390.

 

The risk-on rally has run into a resistance. Unless we close above the 10,640 mark, investors should not rush to make fresh investment.

 

Now that we know the views of Powell expect him to repeat the same at his Senate Banking Committee testimony. If he changes tack, it will be great for a bounce back. But if does not, it won’t result in renewed weakness.

 

Fundamentally speaking, the US Fed will have to tow the GDP (gross domestic product) growth line and then look at rate hikes.

 

So, we get back to Fed-watch again. However, the solace this time around is that despite a clear hawkish stance, the 10-year bond yields have not crossed 2.9% mark.

 

Domestically, the Bank Nifty is the weakest link in the markets right now and only when it makes higher bottoms first and then higher highs, should we consider that it is out of the woods.

 

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V K Sharma, is the Head – PCG & Capital Market Strategy at HDFC Securities

 

Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.


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