* Powell says U.S. economy is in a ‘favorable place,’ Fed will ‘act as appropriate’
* Powell says Fed is working to sustain economy that faces ‘significant risks’
* Powell says U.S. economy is close to both of Fed’s goals
* Powell says slowing global growth, trade policy uncertainty, muted inflation weigh on favorable outlook
* Powell says premise that healthy U.S. economy needed higher rates was generally borne out
* Powell says low inflation, not high inflation, is ‘problem of this era’
STOCKS: S&P 500 .SPX slightly pares loss, last down 0.33%
BONDS: U.S. Treasury yields slipped; 2s US2YT=RR at 1.5682%; 10s US10YT=RR at 1.5774%; 2s/10s curve now flatter around 0.8 bps
FOREX: The U.S. dollar index .DXY pares slight gains, last off 0.1%
MINH TRANG, SENIOR FOREIGN EXCHANGE TRADER, SILICON VALLEY BANK, SANTA CLARA, CALIFORNIA
“I don’t think there were any surprises. It’s consistent with the sentiment that you saw in the minutes.
“Powell’s comments basically reiterate a lot of what we have been discussing. That the economy is doing relatively well overall, but there are a lot of challenges and headwinds that are coming our way potentially. I think you could read that in the minutes of the last meeting. The rate cut was more or less an insurance cut to kind of forestall some of these potentially significant headwinds even though the economy is overall doing pretty solid.
“There is a disconnect between the expectations of the market and what the messaging from the Fed is. They haven’t really been in sync for a while now.”
NELA RICHARDSON, INVESTMENT STRATEGIST, EDWARD JONES, ST. LOUIS
“Markets might confuse chair Powell’s comments of today with Draghi’s comments of a few years ago and misinterpret ‘act as appropriate’ with ‘do whatever it takes’. And that’s the risk.”
“What I’ve read of the Powell speech has laid out a very dovish framework that may not be met, given what we are seeing in the economy, slight increases in inflation, stronger retail sales. The recent data, except for the manufacturing, don’t really support a strong, aggressive, do-whatever-it-takes monetary stance and yet that’s exactly what the markets are pricing in right now.”
GENNADIY GOLDBERG, INTEREST RATE STRATEGIST, TD SECURITIES, NEW YORK
“Powell’s kind of sticking to the tone. It sounds very much like the minutes, he’s presenting the same arguments, he’s speaking for the committee rather than just for himself, it sounds like, and not committing. The one interesting point is he did talk about all the risks that have happened since the July meeting, and that suggests that he is allowing the markets to price in a September move. That’s where the ‘act as appropriate’ language comes in. That tells us that a September cut is probably a go, not that the market was uncertain to begin with. The kind of disappointing part here is that Powell did not commit to easing rates further, given these global uncertainties. So they are going to be taking these cuts one at a time, rather than providing any kind of forward guidance.”
RICHARD FRANULOVICH, HEAD OF FX STRATEGY, WESTPAC, NEW YORK
“The headlines seem consistent with a central banker attentive to the risk and prepared to do more to support the expansion and do whatever it takes to underwrite a continuing recovery. I don’t think that’s particularly new or innovative. That’s what Powell has been saying for some time. And the reaction in the FX market is pretty muted.
“I don’t really know what the market was thinking would be delivered, but if you’re betting on another two or three cuts, you wouldn’t be dissuaded by this speech based on the headlines. It doesn’t look like he has leapfrogged expectations. I guess he’s cementing an easing bias and he’s prepared to do more as needed.”
SEAN SIMKO, HEAD OF GLOBAL INCOME MANAGEMENT, SEI INVESTMENTS, OAKS, PENNSYLVANIA
“The markets are not reacting too much right now. The message he is providing is that we will be vigilant and are watching everything that’s developing. The question is whether the market will be comfortable with them, to wait for them to assess the data points and then make judgments whether the rates need to be lower. The economy is growing but we are seeing some slowdown. He hasn’t taken the opportunity to remove expectations about a rate cut next month. The size of the next cut will depend on how the data come out and how the global economy evolves in the next couple of weeks. The message is that they really want to keep this economy going.
“The yield curve is saying the Fed is not doing enough, they are behind the curve. They want the Fed to do 50 basis points.
We continue to favor duration. With any backup in yields, we are looking to add exposure. That wall of worries will help flows into U.S. Treasuries. That will keep the 10-year yield in this 1.50-1.75% range, maybe even lower especially if any of those worries on the economy, trade and Brexit intensify.”
Compiled by Alden Bentley