Q&A from Fed Powell: Economy is very resilient and growing strongly

<ul><li>Economy is very resilient, growing strongly</li><li>Growth is running above its longer run trend. That is a surprise</li><li>Economy is a story of stronger demand.</li><li>May be ways economy is less affected by interest rates.</li><li>Interest-sensitive spending is a showing impact of Fed policy.</li><li>We see policy working through usual channels</li><li>I don't think there is a fundamental shift in how rates affect economy.</li><li>We are seeing a change in the exchange rate which is disinflationary</li><li>The fact that we have a strong economy and job market, these are elements we want to see</li><li>No precision in understanding monetary policy lags.</li><li>Markets have been front running Fed policy changes.</li><li>Household savings are higher, spending has been higher. </li><li>We should be seeing effects of monetary policy arriving</li><li>Fed has slowed on rates to give policy time to work.</li><li>We have to use eyes and risk management to monitor monetary policy impact</li><li>There is a lot of uncertainty on lags</li><li>We are moving carefully with policy decisions.</li><li>Long-run potential growth doesn't change much. It is around 2%</li><li>It is very hard to know how economy can grow with higher rates</li><li>Doesn't know where monetary policy will settle.</li><li>Effective lower bound is not an issue for economy, monetary policy.</li><li>By any reckoning, neutral rates ebbed over recent decades, unsure where it is now</li></ul><p>At 12:33 PM ET. Dow industrial average -0.08%. NASDAQ index of -0.24%. 10 year yield 4.957% +5.6 basis points. 2 year yield 5.182% -3.6 basis points.</p><ul><li>Models useful but have to look at what the economy is telling us</li><li>The evidence is not that policy is too tight</li></ul><p>Stocks start to move lower after the last comment (NASDAQ down -0.56%). EURUSD moves back to the 200-hour moving average at 1.05636. 10-year yield 4.987% +8.8 basis points. 2 year yield 5.212% -0.4 basis points </p><ul><li>It's possible we are going into a more inflationary period, but it's hard to know</li><li>Feds issue is trying to get policy right to bring inflation back to 2%.</li><li>With hindsight possible Fed could have done less during pandemic</li><li>Our economy is doing very well.</li><li>We were in a time of disinflation. That period is over. We are now more in a balanced period.</li><li>The possible range of events is now so much wider</li></ul><p>On the bond yield rise</p><ul><li>Bond yields analysis needs humility</li><li>Bond yields are not about expectations of higher inflation, monetary policy review</li><li>Bond yields rise driven by term premiums</li><li>Markets are seeing economic resilience and revising views</li><li>Markets may be responding to deficits, Fed balance sheet actions</li><li>Bond yield rise is tightening financial conditions</li><li>Bond yield rise is not principally about expectations of Fed doing more</li><li>Bond yield rise doesn't seem to be about expectations of Fed doing more on rates</li><li>Is unclear if bond yield rise will be persistent, markets are volatile.</li><li>We will let market yield rise play out, Fed will watch it.</li><li>For now it's clearly a tightening of financial conditions</li><li>Markets have been volatile</li></ul><p>On fiscal front:</p><ul><li>We know fiscal path is ultimately unsustainable.</li><li>Current fiscal situation does not affect fed near-term policy choices.</li><li>Overseas treasury buying has remained robust</li></ul><p>On the real economy:</p><ul><li>Business contacts saying economy remains strong</li><li>Cost of capital could be issue for small companies</li><li>Fed policy is blunt, but it's what the Fed has to tackle inflation</li><li>we know Fed actions are having a negative impact on parts of the economy.</li><li>Fed must get back to price stability</li><li>The world count on us to have lower and stable inflation</li><li>Fed independence is for time when policy choices are tough.</li></ul><p>12:50 PM ET:Stocks have stabilized and trade above and below unchanged. 2 year yield 5.188% -3 basis points. 10 year yield 4.974% +7.3 basis points.</p><ul><li>Higher bond yields are producing tighter financial conditions which the Fed wants</li><li>Higher bond yields is a tightening, and at margin could reduce the need for Fed to tighten.</li><li>At margin higher yields take some pressure off Fed to raise rates.</li></ul><p>On the labor market</p><ul><li>A whole lot of people left the labor market and didn't come back after the pandemic</li><li>There are many signs labor market getting back into balance</li><li>Labor market is gradually cooling by so many measures</li><li>There is been new labor market supply</li><li>It's still a very tight labor market, but it's getting looser.</li><li>Labor force increases, and immigration increases is being seen in the labor markets.</li><li>I don't think most of inflation is from job market (Phillips curve), was demand driven.</li></ul><p>On the banking system</p><ul><li>Things have settled down on the banking front</li><li>Paid a lot of attention to banks that appear to have issues.</li><li>Bank stress has really settled down, Fed is still watching for trouble</li><li>Banks are strong, and well-capitalized.</li><li>Banks are much better at managing risk compared to the past</li><li>Banks in the US are generally well-capitalized and strong.</li></ul><p>On commercial real estate and more on banking risks:</p><ul><li>Work from home is affecting downtown real estate and a lot of big cities</li><li>Commercial real estate is not a big risk for biggest banks. It is a bigger risk for smaller banks.</li><li>Doesn't see systematic risk from commercial real estate problems.</li><li>Bank regulators are working with banks that have concentrations of risk in commercial real estate.</li><li>Regional banks are very important. Mega banks are in very good position</li><li>Regional bank business model under pressure, Fed doesn't want to add to that pressure.</li><li>Fed strongly thinks smaller banks are very important.</li></ul><p>Q&amp;A ends at 1 PM ET:</p><ul><li>NASDAQ up 0.16%</li><li>S&amp;P index up 0.22%</li><li>Dow industrial average up 0.31%</li><li>2 year yield 5.175% -4.2 basis points</li><li>10 year yield 4.957% +5.6 basis points (the yield reached a high of 4.996%)</li><li>30 year yield 5.06% +6.9 basis points</li><li>2-10 year spread is now near -21 basis points</li></ul><p>In the Forex:</p><ul><li>EURUSD. After a dip below the 200 hour MA at 1.0564 on prepared remarks, the price was able to stay above that level with up-and-down volatility. The price reached up to the high of the swing area near 1.0616. The current price is trading at 1.0596.</li></ul><p>Fed hike probability:</p><ul><li>Under 4% of November hike</li><li>35% for a December hike</li></ul>

This article was written by Greg Michalowski at www.forexlive.com.