Fed chairman Jerome Powell was back in focus yesterday, delivering his comments at the National Association for Business Economics Virtual Annual Meeting. During his speech, the Fed chairman was keen to highlight the damage caused by the COVID pandemic as well as the huge policy response actioned by the Fed.

Powell Recalls Strength of US Economy Ahead of COVID

Powell noted that prior to the pandemic, the US economy was in its 128th month of expansion, the longest streak of growth on record. The labour market was strong across a broad range of measures with the unemployment rate running at a 50 year low. Given that there were no visible threats to the economy ahead of the pandemic, Powell said that the Fed and most economic forecasters believed the expansion would continue, identifying no unstable asset bubble or unsustainable boom which might burst.

Highlights Severity of Damage Caused

The Fed chair went on to say that, given the strength of the economy at the time, it seemed feasible that with a strong and co-ordinated policy response early on, most affected sectors would be able to quickly bounce back. However, given the sheer scale of the impact of the virus, which was not initially visible, it then became clear that any sectors of the economy – mainly those relying on face to face contact, would take a much longer time to recover.

Powell noted the 31% drop in GDP in Q2, the loss of 22 million jobs, with temporary layoffs rising by 17 million, and a range other economic damage caused by the shutdowns which were affected in March.

Powell Praises Policy Response

In terms of the response seen, Powell highlighted the use of the bank’s full range of instruments and operations including rate cuts and unprecedented levels of asset purchases as well as the setting up of new and wide-ranging support programs including corporate purchases for the first time. Powell also pointed to the fiscal response including the swift passage of the ACRES Act, along with three other bills, which will provide around $3 trillion in support in total – the highest level of fiscal support since the Great Depression.

Powell noted that the easing of lockdown measures as well as the combined efforts of the fed and the government have helped aid the recovery, though there is still a long way to go. Powell noted that the economy has recovered roughly half of the 22 million jobs lost with the unemployment rate roughly halving from its 14.7% peak in April.

Calls on Further Action

Looking ahead, Powell said the Fed expects the unemployment rate to fall back to 4% and inflation to rise to 2% by 2023. Powell also noted that the momentum of the recovery has weakened from the initial re-opening response and cited the risk that further lockdowns could be needed if COVID cases continue to rise. With this in mind, Powell said that the risks around policy intervention are asymmetric as too little support would damage the recover while there is very little risk of overdoing it and even in such circumstances, it would simply help fuel a stronger recovery.

Technical Views

DXY

From a technical viewpoint. The Dollar Index retested the bearish trend line from 2020 highs, in tandem with the 94.62 level, which has capped price action for now, sending the index back below the 93.81 level. While below here, a test of deeper support at the 92.63 level looks likely.

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