Powell's interview boosts dollar and bond yields
Fed Chair Jay Powell effectively conveyed his message during his 60 Minutes interview on Sunday night, as reflected in the subsequent market movements.
In response to Powell's remarks, the US dollar and bond yields experienced an increase, while gold and share prices declined, leaving enthusiasm tempered. Powell's comments echoed what he had previously stated during his post-meeting media briefing last week and what the Federal Reserve (Fed) had mentioned in its statement.
In the post-meeting statement, the Federal Open Market Committee (FOMC) stated that it would refrain from cutting rates "until it has gained greater confidence that inflation is moving towards the 2% target."
Powell mentioned during the interview, "We'll update [the outlook] at the March meeting. I will say, though, nothing has happened in the meantime that would lead me to think that people would dramatically change their forecasts." He noted that the time for rate cuts might be approaching but perhaps not yet. "With the economy strong like that, we feel like we can approach the question of when to begin to reduce interest rates carefully," he added. "We want to see more evidence that inflation is moving sustainably down to 2%. Our confidence is rising. We just want some more confidence before we take that very important step of beginning to cut interest rates."
A robust jobs report could further delay the possibility of a rate cut, although a significant drop in inflation could potentially alter the situation for the central bank.
Following Powell's remarks, the US dollar surged to its highest level in nearly three months on the dollar index, causing traders to reduce their bets on aggressive Fed interest rate cuts this year. This shift in expectations was reinforced by new economic data that further reduced the likelihood of rate cuts.
Consequently, the Australian dollar fell to 64.80 US cents in the US.
The yield on the 10-year Treasury bond rose by more than 13 basis points to 4.16% as overly optimistic investors finally took note of Powell's suggestion that rates might remain higher for a longer period. In just under a week, the key benchmark rate for global finance surged by more than 30 basis points from around 3.81% last week.
Meanwhile, gold prices declined to a one-week low on Monday due to the stronger dollar and higher bond yields. The Comex front month price was approximately $2,040 per ounce, marking a half-percent decrease.
Oil prices rose due to heightened tensions in the Middle East, while Wall Street shares experienced a decline as the market reacted to the stronger economy rather than more optimistic forecasts about artificial intelligence and the technology giants (excluding Tesla, which was down nearly 4% on Monday).
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.