Federal Reserve Chairman Powell Congressional Testimony Preview: Some optimism would be nice

• Fed Chairman Powell to present the semiannual Monetary Policy Report to Congress.
• Mr. Powell speaks on Tuesday to the Senate Committee on Banking, Housing, and Urban Affairs.
• On Wednesday to the House Committee on Financial Services, U.S. House of Representatives.
• Fed extends bond purchases to individual corporate bonds and the secondary market.
• Equities recover, dollar falls, Treasury yields stable to higher

Federal Reserve Chairman will present the central banks twice-yearly Monetary Policy Report to the Senate on Tuesday and the House on Wednesday in what will likely be a reprise of last week’s FOMC analysis and economic projections.

FOMC policy and projections

The FOMC decision to keep the base rate and several emergency programs instituted in March intact was expected but it was the difficult US economic situation that formed the basis of the Chairman’s own statement and press conference that followed. The bank’s economic and rate projections, delayed since the cancelled March policy meeting were notably pessimistic.

FOMC policy makers expect the fed funds target range to be unchanged at 0.0% to 0.25% through the end of 2022. Economic growth is forecast to contract 6.5% this year followed by a 5% expansion next year and 3.5% in 2022. Unemployment is projected to be 9.3% at the end of this year, 6.5% at the end of 2021 and 5.5% in 2022.

Powell press conference

It was the Chairman’s tone and description of the uncertain economic predicament combined with the projected necessity for ultra-low rates for almost three years that may have acted as a catalyst for the intense equity sell-off last Thursday.

Mt Powell noted that the 2.5 million jobs recorded in May’s non-farm payrolls was a complete surprise to the bank and that the ability of the economy to reconstitute hundreds of thousands of small businesses and their employees was unknown.

Fed to buy corporate bonds

Mr Powell's dour tone and repeated promise to do more if required was a forerunner, intended or not, to the Fed announcement on Monday that it would  begin buying corporate bonds on the secondary market.  

This action sparked a 900 point recovery in the Dow, which closed up 157 points and put the dollar under pressure after last week’s Thursday rally and consolidation. Treasury rates ended slightly higher with the 10-year closing at 0.72%

Conclusion and the US Election

In the current febrile Washington election year atmosphere Senators and Representative from each party will attempt to score points with the apolitical Fed and its deliberate Chairman. But the main focus of the questioning will be the state of the economy and why the Fed thought it necessary to expand its support this week.  

How Mr. Powell explains the Fed’s action will set the tone and direction for the remainder of the week.

If he presents is as insurance and a boost for an economy that is already recovering equities and the dollar could see additional gains.  But if he repeats the uncertainty and pessimism of last week, he will only enhance the worries coursing through the markets.