Explaining the Market Reaction to Powell's Congressional Appearance

New Federal Reserve Chair Jerome Powell appeared before Congress for the first time yesterday, speaking to the House Financial Services Committee.  His testimony promptly caused the US dollar to rise, while bonds and stocks took a sharp fall.

The reaction to Powell's testimony can be attributed to two main factors.  First, he expressed confidence in the US economy, hinting that the Fed might be considering not the three rate hikes previously expected this year by economists, but four.  This prompted analysts to rethink their expectations for the year, and begin to price in higher interest rates.  Second, he broke from his predecessors by appearing more hawkish in response to the turmoil that sent US markets tumbling in early February, saying it did not affect his opinion about the need for rate hikes this year.  His statement gave markets the first indication of what to expect from his tenure as Fed Chair, signalling that he would be more willing to wait out market volatility than his more interventionist predecessors, Janet Yellen and Alan Greenspan.

Powell is set to appear before Congress again on Thursday, this time before the Senate Banking Committee.  Investors will be watching closely for additional signals about the direction of his leadership.