Trump’s pick for Fed chair likely to stay the course

The nomination of Jerome Powell does not change our views on interest rate hikes

James OngTime to read: 2 min

On Thursday, President Donald Trump nominated Jerome Powell to serve as the next chair of the Federal Reserve Board (Fed). The news was expected as consensus over the past few weeks had increasingly showed Powell as the frontrunner. By the time of the announcement, bond markets had already priced in a Powell appointment, and we saw very little volatility or market reaction to the nomination.

Powell, who sits on the Fed Board of Governors, has been viewed as the safe choice and the candidate most in line with current Fed Chair Janet Yellen’s views. We expect he will

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Why is inflation surprisingly low?

Hint: volatile and stable core prices have slumped, but rebound is likely

James OngOver the past five months, the US has experienced a string of surprisingly low inflation reports. After peaking at 2.7% in February, annual growth in the Consumer Price Index (CPI) dropped to 1.7% by July.1 More importantly, “core” inflation, which removes the volatile food and energy components, fell from 2.2% to 1.7% over the same period.1 Because core inflation is an important determinant of bond prices and US Federal Reserve (Fed) policy, we believe it is important for investors to understand what drives it and how it is likely to evolve in the future.

There are two main drivers of core inflation

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GDP growth dims, but we see bright spots ahead

We believe consumption is poised to bounce back, while investment activity shows strength

James OngUS gross domestic product (GDP) rose only slightly in the first quarter, but this result was in line with Invesco Fixed Income’s expectations and we still expect solid growth this year. While output grew by only 0.7% annualized between January and March, we believe the underlying details of the data were supportive of stronger growth in the coming quarters.1

As shown in the chart below, consumption was the big disappointment, expanding by only 0.3%, versus averaging around 1.6% growth since 2009. However, we believe the current high level of consumer confidence, above average employment growth and rising pay suggest that consumption is likely to bounce back. Also, initial GDP releases have tended to misread consumption. Gathering consumption data has become more challenging as the bulk of consumption shifts away from easier-to-measure sectors, such as autos, toward harder-to-measure ones, such as services. So, it’s possible we may get a positive upward revision.

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New jobs report disappoints, but shouldn’t stop the Fed

A June rate hike is still possible given longer-term employment trends

James OngCorum

Today’s jobs report from the US Bureau of Labor Statistics was headlined by a much lower-than-expected number, with nonfarm payrolls growing by just 98,000 in March. Yet, we at Invesco Fixed Income don’t think the results are as bad as the headline indicates, and it does not change our view of future Federal Reserve interest rate hikes.

 Analyzing the jobs report

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Fed rate hike: Further monetary tightening expected amid synchronized global growth

Bond markets likely to absorb rate increase with limited impact, but questions remain on Fed’s economic projections

James OngCorumIn its March 14‒15 meetings, the Federal Reserve (Fed) will decide whether to raise interest rates for the third time since it began monetary policy normalization 15 months ago.1 Invesco Fixed Income believes there is a high probability that the Fed will raise its policy rate by 0.25% next week. Fed Chair Janet Yellen and Vice Chair Stanley Fischer have indeed signaled in recent statements that they believe a rate increase is likely to be appropriate. Further monetary tightening has been in the cards for some time; however, the bond markets had not placed a high probability of a March rate hike even a few weeks ago.

What has changed in the last few weeks to cement expectations of a March hike?

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