Powell, Fed Officials Highlight US Economy, Debt & Repo Strains

US DOLLAR & LATEST FED OFFICIAL COMMENTARY:

• A litany of Federal Reserve members spoke today, notably Chair Powell and New York Fed President Williams
• Repo market issues were a prime issue discussed across speakers along with ongoing trade uncertainty and unsustainable growth of domestic debt
• DailyFX Forecasts are published on a variety of markets such as Gold, the US Dollar or the Euro and are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide

FED CHAIR POWELL

Federal Reserve Chair Jerome Powell testified on Capital Hill before the House Budget Committee today, following testimony yesterday before the Senate’s Joint Economic Committee. His prepared remarks remained largely the same between the two Congressional committees. In those remarks, Powell stated the same key phrase used during the October Fed meeting press conference that a ‘material reassessment’ to the outlook is needed for a shift to the outlook on rates going forward.

Following the Chairman's prepared remarks lawmakers questioned Powell on various topics, but prime issues gyrated around trade tensions with China and the growing US debt pile. As more focus turns to the ever-growing amount of government debt as the business cycle continues to age, lawmakers and investors grow increasingly concerned that monetary policy may not provide enough firepower in the event of a prolonged economic downturn or recession.

When asked about the ballooning level of national debt, MrPowell stated, “our debt is growing faster than our economy, by a margin, so that makes it unsustainable”. He was referencing the growth of the government’s balance sheet in comparison to GDP growth. Furthermore, the head central banker noted that there is no specific point where the debt would cause a crisis, but that our children and grandchildren would be spending more on interest for that debt, when they could be spending on healthcare, education and security.

Lawmakers also inquired about the recent manufacturing recession in the United States, which has caused concern about a spillover into the larger services sector of the US economy. Powell said the Fed is monitoring that risks but as of now , there is no impact on the services sector.

The repo markets, a popular theme in markets as of late after September’s liquidity crunch caused havoc on overnight borrowing costs between banks was also brought up, with Powell saying that “This is nothing that will effect economic outcomes” and “this really comes down to the level of reserves.” The fed continues to assess the situation in repo markets, as many have been adamant for the need of a standing repo facility going forward.

US DOLLAR PRICE CHART: 5-MINUTE TIME FRAME (NOVEMBER 14, 2019 INTRADAY)

New York Fed President and FOMC Vice Chair John Williams

NY Fed President Williams spoke this morning, staying mostly inline with remarks made by Powell from the FOMC press conference last month. Williams reiterated that the economy is in a good place and the outlook remains largely data dependent. Furthermore, Williams stated that trade uncertainties could persist even if a deal between the US and China is reached.

US Federal Reserve Balance Sheet (2006-Present)

In reference to repo operations, which Williams largely oversees as the President of the New York Fed and its desk, he stated that that interventions into the repo markets are behaving well and the aim right now is to bring the level of reserves back to the $1.5 trillion mark. Later in the day the New York Fed Trading Desk announced additional repo operations with 28- and 42-day operations, which would be in addition to maintaining overnight repo operations of at least $120 billion.

CHICAGO FED PRESIDENT CHARLES EVANS

Chicago Fed President Evans spoke early this morning but did not comment on monetary policy or the economy. However, he did note that it is critical for an assessment to be done on Facebook’s digital currency Libra and its potential impacts it may harbor. To reinforce the concern Evans said that Facebook’s recent missteps on security and privacy have raised questions on the implications of the cryptocurrency.

ST. LOUIS FED PRESIDENT JAMES BULLARD

Speaking at the Rotary Club of Louisville, James Bullard said that the positive slope on the yield curve is bullish for next year and this year three rate cuts could put inflation back in target for the fed. A known dove, Bullard continued to harp on a wait and see approach for after this year’s cuts.

2-Year/10-Year US Yield Curve

DALLAS FED PRESIDENT ROBERT KAPLAN

Dallas Fed President Kaplan stayed in step with most of his counterparts speaking today. Kaplan stated that the economy remains in good shape with a strong labor market that is “very tight.” Going on, Kaplan said he believes the US has a good shot at achieving 2 percent GDP growth for 2020. Furthermore, Kaplan echoes his colleagues saying that strain is being created from the issuance of government debt and went on to say, debt should be moderated during these good times.

Federal Funds Futures are pricing a 7.7% probability for a rate cut at next month’s FOMC meeting, down from 57.7% on October 3rd.

FOMC INTERST RATE CHANGE IMPLIED PROBABILITIES (December 2020)

--Written by Thomas Westwater, Intern Analyst for DailyFX.com

Contact and follow Thomas on Twitter @FxWestwater

DailyFX forecasts on a variety of currencies such as the US Dollar or the Euro are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.