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No sign USA economy 'overheating': Fed Chair Powell

03 March 2018

Federal Reserve Chairman Jerome Powell, pledging to "strike a balance" between the risk of an overheating economy and the need to keep growth on track, told US lawmakers on Tuesday that the central bank would stick with gradual interest rate increases despite the added stimulus of tax cuts and government spending.

The gap between short-dated US borrowing costs and those in Germany was at its widest in over 20 years as the monetary policy outlooks by the Fed and European Central Bank for the two regions diverged.

Former Fed chief Ben Bernanke famously set off a global bond rout - the "taper tantrum" - in 2013 when he indicated the central bank was about to scale down the bond buying program it began to fight the 2007-2009 financial crisis. Monthly job gains averaged 179,000 from July through December, and payrolls rose an additional 200,000 in January.

In response to the Great Recession and a weak economic recovery, the Fed embarked on three rounds of large-scale purchases of Treasurys and mortgage bonds to keep long-term interest rates low to spur investment and consumption.

The Fed raised rates three times in 2017. The last time was before the 2008 financial crisis.

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Still, "inflation remains below our 2 percent longer-run objective". Prices have fallen about 1 per cent so far this week.

Still, the energy group rose, helped by a 1.8% gain for the shares of Canadian Natural Resources to $40.45 after the company reported Q4 profit that beat estimates.

Rather, "the robust job market should continue to support growth in household incomes and consumer spending, solid economic growth among our trading partners should lead to further gains in US exports, and upbeat business sentiment and strong sales growth will likely continue to boost business investment", he said. He vaguely clarified that 'fiscal policy is one of many factors behind our [FOMC] rate outlook.

A PAINFUL MONTH: The S&P 500 is on track to close out February with a 2.8 percent loss, a sharp turnaround from its blistering start to the year. Second, as we've been saying, the market is increasingly focused on what the Fed says and may do when it comes to monetary policy.

"In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2% on a sustained basis".

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During the same testimony, Powell commented on the economy more broadly.

Markets had plunged after Powell's initial testimony on Tuesday, when his first public remarks as Fed chair were marked by bullish comments on the United States economy.

YIELDS: The 10-year Treasury note dipped to 2.88 percent from 2.90 percent late Tuesday.

The two-year Treasury yield, which is more influenced by expectations for movements by the Fed, held steady at 2.27 percent. For illustrative purposes only.

Traders were on edge during Powell's second day of Congressional testimony after his comments on Tuesday about the strength of the US economy opened the door to speculation that the central bank plans to quicken the pace of monetary tightening, a move investors worry could derail growth.

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The Fed can at any time change the key interest rate that sets everything from mortgages to vehicle loans, but in recent years it has only done so at one of the four policy meetings that includes a press conference by the Fed chief, like the one in March.

No sign USA economy 'overheating': Fed Chair Powell