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Senior economist at UOB Group Alvin Liew reviews the recent testimony by Chairman Powell before the Congress.

Key Quotes

“The main takeaway from the Federal Reserve Chair Powell’s testimony before the US Senate Committee on Banking, Housing, and Urban Affairs on Tuesday (23 Feb) was unsurprisingly, the central bank’s assurance that the Fed is keeping its easy monetary policies in place for some time.”

“Powell noted the recovery remains uneven and far from complete with the path ahead highly uncertain even though he was optimistic that developments point to an improved outlook for later this year. Importantly, he emphasized the economy is a long way from the Fed’s employment and inflation goals, which are likely to take some time for substantial further progress to be achieved.”

“Powell also viewed that the pace of improvement in US labor market has slowed, and that he will not tighten monetary policy solely in response to a strong labor market.”

“His assessment of inflation remained benign, noting the pandemic has left a ‘significant imprint’ on inflation with prices particularly soft in sectors most affected by COVID-19. Inflation remains below our 2% longer run objective and he expects readings to move up temporarily due to base effects. He believed spending will pick up substantially in 2H but it does not seem likely that an increase in spending will lead to large or persistent inflation. He also did not see how a burst in fiscal support or spending would lead to high inflation. He expects inflation to be a bit volatile over next year or so and may see upward pressure on prices as economy fully reopens, but he was certain it will not be large or persistent effects, nor will it rise to troubling levels.”

“Powell’s latest testimony continued to reaffirm the expectations that it would be “some time” before conditions to scale back their massive bond purchases were met. Going forward, our base case remains for the Fed to stay on hold for most of 2021, at least, and the taper discussion will only start in late 2021/early 2022. This is premised on the continued successful rollout of vaccinations across the US, more fiscal stimulus in the coming months, and the subsequent reduction in COVID-19 infections and deaths. We continue to hold the view that the Fed will keep policy rates at the current 0.0-0.25% region at least until 2023.”

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