Fed's Powell defends policy of gradual interest rate hikes

So far this year the rupee has weakened 8.9% while foreign investors have sold $493.40 million and $5.57 billion in equity and debt markets respectively

His speech reflected that, brimming with criticism of reliance on economic models that gauge current economic conditions based on assumptions about the "natural" or "neutral" rate of unemployment, interest rate, inflation, or economic growth.

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But Powell signaled on Friday that the Fed is likely to continue gradually increasing interest rates as the USA economy "is strong" and inflation is near the central bank's 2 percent target.

The U.S. Dollar spiked lower on the news with the headlines reading that Trump's comments triggered the break. It has also notched up braod gains over the Russian Rouble and Brazilian Real as well as a host of Asian currencies. Growth is expected to remain close to 4.0 percent and to keep validating the policy decisions from the Fed.

Powell adds that while annual inflation has risen to near the Fed's 2 per cent target rate, it doesn't seem likely to accelerate above that point. "This is good news", Powell told his audience.

"Congress understood this tension might exist between a central bank, which is responsible for the money supply, and those that have other angles in the economy", she said. Inflation is near our 2% objective, and most people who want a job are finding one ...

Where he stands on the pace of interest rate hikes will be scrutinized after minutes from the Fed's most recent policy meeting indicated the central bank would tighten monetary policy soon.

New orders for key US -made capital goods increased more than expected in July and shipments growth held firm, the Commerce Department said. As the Fed comes closer to ending its rate hikes, and the other central banks start to raise rates especially the European Central Bank, the dollar will eventually weaken.

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The US Dollar (via the DXY Index) is closing in on its lows of the week established on Wednesday as traders are heading into the weekend disappointed by what they've heard so far at the Jackson Hole Economic Policy Symposium. The Pound-to-Dollar rate was 0.38% higher at 1.2857 and the Euro-to-Dollar rate was 0.61% higher at 1.1611.

Strong economic growth, strong earnings and low interest rates have combined to continue to move the US equity market higher, said Leo Grohowski, chief investment officer for BNY Mellon Wealth Management. Five of those rate hikes, including two this year, have occurred with Trump in the White House.

"My colleagues and I", the Fed chairman said in his speech, "are carefully monitoring incoming data, and we are setting policy to do what monetary policy can do to support continued growth, a strong labor market, and inflation near 2 percent". The particular danger for him is that weakness could coincide with the 2020 election campaign, when he would be most vulnerable.

With Powell sticking to his guns, "the news won't be welcomed by president Donald Trump", said Andrew Hunter, US economist at the consultancy Capital Economics.

Friday's price action comes after talks between U.S. and Chinese trade representatives appeared to end without any breakthrough or success in de-escalating the so called "trade war" between the two. Trump had suggested that a change of course would be better for the country. The Dollar index is now up 3% for 2018 after more than reversing a % first-quarter loss.

The U.S. jobless rate is now 3.9 percent, well below the 5 percent target the Fed has considered the minimum level for stable prices.

Chinese finance minister Liu Kun told Reuters Friday the Chinese government intends to keep hitting back at the White House but that, rather than slavishly matching the U.S. tariffs it will box clever.

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