Takeaways from Chairman Powell's Testimony
Wednesday, during its semi-annual hearing of Monetary Policy and the State of the Economy, the House Financial Services Committee hosted Federal Reserve Chairman Jerome Powell who reported on the Fed's economic outlook for 2019 and highlighted various economic "crosscurrents" he believes may impact the Fed's ability to achieve its dual mandate of stable prices and maximum employment. Below are The Demand Side’s key takeaways from the hearing.
1.) Trump’s Trade War is Raising Concerns about Future Growth. In his second appearance before the committee this year, Chairman Powell touched on a variety of issues ranging from inequities in access to credit, to federal investments in higher education, to workforce retraining. But of all the issues mentioned during the hearing, Mr. Powell made clear that the issues of greatest concern to the FOMC are slowdowns in global growth and threats to international trade. “The bottom line for me is that uncertainties around global growth and trade continue to weigh on the outlook," said Mr. Powell. And when questioned specifically to impacts of President Trump’s trade policies, he noted that “If [the administration’s trade policy] results in higher tariffs across a broad range of traded goods and services, and remains that way for a long period of time—it will be bad for our economy and for other economies too."
2.) The Fed is Frustrated with Low Inflation. The chairman was questioned on numerous occasions what he thinks would be the FOMC’s basis for cutting interest rates at its next meeting, leading him to reiterate the FOMC’s concerns over failing to meet the Fed's established 2% inflation target—especially when rates have been low for such a long time—and the need for monetary recalibration. Further, when pressed by Congresswoman Maloney on whether the he believes the tight labor market is running hot and may lead to future inflation, he responded “we don’t have any basis, or any evidence, for calling this a hot labor market. To call something hot, you need to see some heat, and while we hear lots of reports of companies having a hard time finding qualified labor, we don’t really see wages responding.”
3.) Balance Sheet Normalization is Over. Through the process of decreasing treasury purchases and allowing longer-dated securities to mature without replacement, the Fed, beginning in late 2018, charted a course of balance sheet normalization. However due to lackluster inflation numbers and unforeseen trade consequences, the FOMC decided that such efforts will end in September, as the Fed eyes a more accommodative policy stance. Briefly touching on the issue of balance sheet normalization, Mr. Powell said “The FOMC has made a number of important decisions this year about our framework for implementing monetary policy and our plans for completing the reduction of the Fed's securities holdings...[but]...at our March meeting, we communicated our intention to slow—starting in May—the decline in the Fed's aggregate securities holdings and to end the reduction in these holdings in September.”
4.) The Fed Will Cut Rates at the Next FOMC Meeting. The futures markets have priced a 100% likelihood the Fed will cut rates at the next FOMC meeting, leading many to believe it’s not if, but rather by how much, the FOMC will cut. Will it be 25 basis points? 50? It really is tough to say. But a key point to keep in mind is that the recent employment numbers—which stood at 224,000 new jobs created in June—had zero impact on the Fed’s near-term outlook because when asked whether the June numbers in any way influenced the FOMC’s decision making process, the Chairman responded with a resounding "No.”
So while we can assume the FOMC will be busy over the next few weeks analyzing data and vigorously debating how much to cut, at least there is a consensus among central bankers at the Fed—and surprisingly policymakers on the Hill—that more accommodation is necessary. In the meantime, we can only hope the White House doesn't issue more autarkic policies that only harm the US economy and make it harder for the Fed to do a job that is already hard enough.