Powell’s Testimony on Impact of Trade Tensions Will Set the Tone TodayIn conclusion, after reading Powell’s recent interviews and recent monetary policy statements, I am going to assume that he is going to say the economy is great, the Fed’s going to raise rates at least two more times this year and that the economy is essentially protected against the long-term impact of a trade war.
Stocks are trading lower shortly ahead of the congressional testimony of U.S. Federal Reserve Chairman Jerome Powell. The price action is being primarily driven by position-squaring ahead of the Fed chief’s testimony and disappointing news from Netflix shortly after yesterday’s cash market close.
As far as Powell is concerned, the markets are looking for him to reiterate his strong assessment of the U.S. economy that was highlighted in the FOMC minutes, as well as in his recent speeches and interviews. Investors and traders are likely to go about business as usual during this part of his testimony because there is not a lot that Powell can say to detract from last week’s solid producer and consumer inflation reports. Or for that matter, the series of better-than-expected economic reports.
Traders’ ears are likely to perk up at the mere mention of trade tensions, however. For months, investors and traders have been reading about the negative effects of trade tariffs. Just yesterday, the International Monetary Fund warned that tariffs could slow global economic growth.
Look for Powell to warn against any further escalation. At this point, his testimony is likely to fall prey to politics as Democratic congressional leaders are likely to pressure him to further elaborate on what he means. They are going to grill Powell on the specific damage a prolonged trade war with China or the European Union could have on the economy. At this point in the conversation, investors may call “time-out” to remind the Democrats that in the past, they have been the one’s calling for protectionist measures and louder than the Republicans.
Powell could come out and say that tariffs can be bad for the economy and leave it at that. However, he may say that despite the negative connotation of tariffs, per se, the U.S. economy is strong enough to withstand any short-term ramifications from the tariffs. And since he was appointed by a Republican President after a lengthy interview process, he may just say that.
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The point is the economic numbers speak for themselves and the economy is strong. So Powell is going to have to say something far out in leftfield to derail the stock market rally, or even the strength in the U.S. Dollar. Furthermore, while the Democratic congressional members may try to get him to slip up and say something like a trade dispute can be an economic disaster for the economy, the Republicans should be right there to get him to stay the course.
In conclusion, after reading Powell’s recent interviews and recent monetary policy statements, I am going to assume that he is going to say the economy is great, the Fed’s going to raise rates at least two more times this year and that the economy is essentially protected against the long-term impact of a trade war.