Financial markets barely batted an eye on Tuesday when Jerome Powell's first public statement as Federal Reserve chief saw daylight, interpreting it as a steady-handed commitment to the US central bank's policy of gradual interest rate increases. The Dow fell almost 300 points that afternoon and plunged another 380.83 Wednesday, closing at 25,029.20. Investors have anxious that the US central bank will accelerate the pace of its interest rate increases this year. He also highlighted gains in USA exports and stimulative fiscal policy as new "tailwinds" for the economy.
Markets had plunged after Powell's initial testimony on Tuesday, when his first public remarks as Fed chair were marked by bullish comments on the USA economy.
Powell acknowledged that the economy is strengthening and inflation is moving up, which may trigger the policy makers to rethink their plan for three hikes. "I wouldn't want to prejudge that new set of projections, but we'll be taking into account everything that's happened since December". He stated, 'We see idiosyncratic factors behind low inflation and its part of a global phenomenon.
Among the new economic drivers were stimulative fiscal policy and firm demand for United States exports, said Mr Powell.
Powell also said he doesn't see a tightening labor market causing wages to hit "a point of acceleration".
USA benchmark 10-year Treasury notes last rose 15/32 in price to push yields lower to 2.8114 percent but are still near four year highs.
One of the key aspects of Powell's question-time comments was his view on the "continuing strength in the labour market".
"If you were to go to four, 25-basis-point rate hikes I think it would still be gradual", Dudley said, according to a Reuters report.
Among the major indexes in the region, the CAC 40 Index of France is down 61.65 points or 1.16 percent, the German DAX is losing 196.44 points or 1.58 percent, the U.K. FTSE 100 Index is slipping 49.84 points or 0.69 percent and the Swiss Market Index is declining 78.41 points or 0.88 percent.
If the Fed does raise rates four times this year, it could upset markets when many investors have been preparing for only three increases, said Rich Weiss, chief investment officer of multi-asset strategies at American Century Investments.
The nervousness on the financial markets may have been compounded by news that striking teachers in West Virginia were denouncing a sellout agreement announced Tuesday by teachers' union leaders and planning to defy their call for a return to work on Thursday.
This presents a delicate balancing act for the new Fed chairman as he tries to prevent an economy with unemployment at its lowest rate since the early 2000s from overheating even as inflation hovers below the Fed's target. In forward market, the premium for dollar drifted further due to sustained receiving from exporters on Wednesday. But also that if inflation starts to rise the Fed needs to be sensitive to that. For example, in the Gold News Monitor on February 13, we wrote that Powell could move faster on normalization than Yellen, as the macroeconomic conditions have become more favorable.
"(They're) expected to rise one per cent, (while) Westpac forecasts a 0.8 per cent increase with equipment capex rising one per cent and building and structures up 0.6 per cent".
The Fed has been trying to nudge inflation higher without risking a recession. "We are in the process of gradually normalizing both interest rate policy and our balance sheet with a view to extending the recovery and sustaining the pursuit of our objectives".
Asked by Carolyn Maloney, a Democratic Congresswoman from NY, about the likely number of rate increases this year, Mr Powell said his confidence about inflation had risen since the Fed's December forecasts. The country's Q4 seasonally adjusted CAPEX dropped 0.2 percent quarter-on-quarter, which meant it missed market estimates of a 0.9 percent growth.