Q&A from Fed Powell: Economy is very resilient and growing strongly

• Economy is very resilient, growing strongly
• Growth is running above its longer run trend. That is a surprise
• Economy is a story of stronger demand.
• May be ways economy is less affected by interest rates.
• Interest-sensitive spending is a showing impact of Fed policy.
• We see policy working through usual channels
• I don't think there is a fundamental shift in how rates affect economy.
• We are seeing a change in the exchange rate which is disinflationary
• The fact that we have a strong economy and job market, these are elements we want to see
• No precision in understanding monetary policy lags.
• Markets have been front running Fed policy changes.
• Household savings are higher, spending has been higher.
• We should be seeing effects of monetary policy arriving
• Fed has slowed on rates to give policy time to work.
• We have to use eyes and risk management to monitor monetary policy impact
• There is a lot of uncertainty on lags
• We are moving carefully with policy decisions.
• Long-run potential growth doesn't change much. It is around 2%
• It is very hard to know how economy can grow with higher rates
• Doesn't know where monetary policy will settle.
• Effective lower bound is not an issue for economy, monetary policy.
• By any reckoning, neutral rates ebbed over recent decades, unsure where it is now

At 12:33 PM ET. Dow industrial average -0.08%. NASDAQ index of -0.24%. 10 year yield 4.957% +5.6 basis points. 2 year yield 5.182% -3.6 basis points.

• Models useful but have to look at what the economy is telling us
• The evidence is not that policy is too tight

Stocks start to move lower after the last comment (NASDAQ down -0.56%). EURUSD moves back to the 200-hour moving average at 1.05636. 10-year yield 4.987% +8.8 basis points. 2 year yield 5.212% -0.4 basis points

• It's possible we are going into a more inflationary period, but it's hard to know
• Feds issue is trying to get policy right to bring inflation back to 2%.
• With hindsight possible Fed could have done less during pandemic
• Our economy is doing very well.
• We were in a time of disinflation. That period is over. We are now more in a balanced period.
• The possible range of events is now so much wider

On the bond yield rise

• Bond yields analysis needs humility
• Bond yields are not about expectations of higher inflation, monetary policy review
• Bond yields rise driven by term premiums
• Markets are seeing economic resilience and revising views
• Markets may be responding to deficits, Fed balance sheet actions
• Bond yield rise is tightening financial conditions
• Bond yield rise is not principally about expectations of Fed doing more
• Bond yield rise doesn't seem to be about expectations of Fed doing more on rates
• Is unclear if bond yield rise will be persistent, markets are volatile.
• We will let market yield rise play out, Fed will watch it.
• For now it's clearly a tightening of financial conditions
• Markets have been volatile

On fiscal front:

• We know fiscal path is ultimately unsustainable.
• Current fiscal situation does not affect fed near-term policy choices.
• Overseas treasury buying has remained robust

On the real economy:

• Business contacts saying economy remains strong
• Cost of capital could be issue for small companies
• Fed policy is blunt, but it's what the Fed has to tackle inflation
• we know Fed actions are having a negative impact on parts of the economy.
• Fed must get back to price stability
• The world count on us to have lower and stable inflation
• Fed independence is for time when policy choices are tough.

12:50 PM ET:Stocks have stabilized and trade above and below unchanged. 2 year yield 5.188% -3 basis points. 10 year yield 4.974% +7.3 basis points.

• Higher bond yields are producing tighter financial conditions which the Fed wants
• Higher bond yields is a tightening, and at margin could reduce the need for Fed to tighten.
• At margin higher yields take some pressure off Fed to raise rates.

On the labor market

• A whole lot of people left the labor market and didn't come back after the pandemic
• There are many signs labor market getting back into balance
• Labor market is gradually cooling by so many measures
• There is been new labor market supply
• It's still a very tight labor market, but it's getting looser.
• Labor force increases, and immigration increases is being seen in the labor markets.
• I don't think most of inflation is from job market (Phillips curve), was demand driven.

On the banking system

• Things have settled down on the banking front
• Paid a lot of attention to banks that appear to have issues.
• Bank stress has really settled down, Fed is still watching for trouble
• Banks are strong, and well-capitalized.
• Banks are much better at managing risk compared to the past
• Banks in the US are generally well-capitalized and strong.

On commercial real estate and more on banking risks:

• Work from home is affecting downtown real estate and a lot of big cities
• Commercial real estate is not a big risk for biggest banks. It is a bigger risk for smaller banks.
• Doesn't see systematic risk from commercial real estate problems.
• Bank regulators are working with banks that have concentrations of risk in commercial real estate.
• Regional banks are very important. Mega banks are in very good position
• Regional bank business model under pressure, Fed doesn't want to add to that pressure.
• Fed strongly thinks smaller banks are very important.

Q&A ends at 1 PM ET:

• NASDAQ up 0.16%
• S&P index up 0.22%
• Dow industrial average up 0.31%
• 2 year yield 5.175% -4.2 basis points
• 10 year yield 4.957% +5.6 basis points (the yield reached a high of 4.996%)
• 30 year yield 5.06% +6.9 basis points
• 2-10 year spread is now near -21 basis points

In the Forex:

• EURUSD. After a dip below the 200 hour MA at 1.0564 on prepared remarks, the price was able to stay above that level with up-and-down volatility. The price reached up to the high of the swing area near 1.0616. The current price is trading at 1.0596.

Fed hike probability:

• Under 4% of November hike
• 35% for a December hike