On Wednesday the Chair of the Federal Reserve – Jerome Powell – continued with his congressional testimony and spoke on the current state of the American economy, and the potential headwinds that can curb its growth in the near term.
He began by reiterating his remarks from the day prior, by attesting to the solid footing on which the US economy currently finds itself.
Unemployment is at a 3.6 per cent historic low; the average wage growth has edged higher at 3 per cent annually, and headline inflation is supporting the current price stability.
Nevertheless, Powell cautioned against the "blow" that can be caused to the fragile global economy by the spread of the deadly COVID-19 in China and elsewhere. He admitted that it could also have a negative impact on US growth if the situation continues to worsen.
Additionally, Powell talked about the low interest rates in the US and elsewhere, and warned that they have now ‘became part of the US economy’, which bears potential dangers on its own.
Powell stressed that if a new economic downturn were to take place in the current environment, the Federal Reserve would have limited choices to tackle such a likely contraction in economic growth.
There is a very limited spare capacity between the current 1.75 per cent interest and negative interest rates, which decreases the potential choices that are faced by Powell and the FOMC.
He went on to argue that the only real alternative in such a scenario would be to print more money, which, in turn, would devalue the dollar and curb the economic stability in a wholly different way.
Meanwhile, welcoming news for the US stock market is the fact that the CBOE volatility index –VIX- fell during the last several days compared to the S&P 500, which means that the overall threat to the SPX has been momentarily diminished.
SPX vs VIX 1D Chart. Image source: Trendsharks ©, created with TradingView.com
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