Fed Chair Powell kept to the patience script as he began his two-day testimony on Capitol Hill, suggesting that rates are likely in an extended holding pattern. Speaking to the House Financial Committee today, the Fed chief again said the U.S. economy was in a “very good place” with solid fundamentals supporting household spending.

Of course, a few risks were given the nod, including the coronavirus and a couple of long-run challenges: low labour force participation rate and productivity gains. The Fed Chair also raised concerns about the federal budget, suggesting that lawmakers work to reduce the widening deficits (now headed for over $1 trillion this fiscal year).

Overall, with the U.S. economy appearing “resilient” in the face of global headwinds, Chair Powell signalled that current policy remains appropriate and maintained a firm conviction that inflation will move closer to the 2% target in the coming months. That means a further cut will likely not be considered unless a “persistent” and “material” change to the outlook emerges. Although it’s too early to assess the true impact from the coronavirus outbreak (or COVID-19), a healthy U.S. economy looks likely to withstand any potential spill-over effects. We’re still expecting the Fed to remain on the sidelines this year, assuming core inflation returns to the target.

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