All eyes will turn to brand new Fed Chair (and guy who is regretting it already) Jerome Powell on Tuesday as he heads to Capitol Hill to regale lawmakers with some shit they won’t understand.
Markets will parse Powell’s testimony relentlessly for clues about the outlook for the economy, inflation and ultimately, for any hint that the committee is leaning towards four hikes in 2018.
Overnight, everyone was in a holding pattern ahead of Powell’s comments.
To be sure, this could be a complete non-event. But then again, no one really knows how “successful” ol’ Jay is going to be on the communications/forward guidance front.
Becoming a master of obfuscation and double-speak isn’t something one does overnight and as we’ve spent the last week reminding you, the circumstances here are unique (e.g. questionably-timed fiscal stimulus and the balance sheet rundown).
For those interested, below are some excerpts from some of the analyst color on this.
Our economics team expects him to project confidence that inflation will rise, that activity will accelerate, and that the FOMC will gradually raise rates, while possibly mentioning the importance of longer-run fiscal sustainability.
Fed Chair Jerome Powell will present the FOMC’s semiannual monetary policy report to Congress before the House and Senate (Thursday). Although Powell has appeared before the Congress for his confirmation hearings, this will be his first Humphrey Hawkins testimony and will be closely analyzed for hints about policy direction. We expect Powell will strive to convey policy continuity rather than regime change. Chair Powell would probably emphasize the cumulative progress towards the Fed’s dual mandate since the start of the current tightening cycle. He is likely to repeat that further gradual increases in the federal funds rate are warranted, and the pace of hikes will be data dependent. Given recent upside surprises in wage and inflation data, and a newly passed fiscal spending agreement, the risk is that Powell will sound more upbeat about the near-term economic outlook. But we do not anticipate a sense of urgency in hiking rates. Questions about the impact of recent tax legislation and budget agreement are likely to surface during the testimony. We expect Chair Powell to bring up both the near-term boost to growth and the long-term concern on debt sustainability. His take on whether the fiscal measure would increase the economy’s long-run potential would be interesting, as recent Fed minutes suggest that participants are divided and uncertain about this issue. Increasing discussions on alternative policy frameworks, such as price-level targeting and nominal GDP targeting, have attracted some market attention lately. Any such changes are likely to take a considerable amount of debate among policy makers. If asked, we expect Powell to express support for the current inflation-targeting framework, while also noting the committee may consider alternatives. We raised our fed funds rate forecast to four rate hikes this year after the passage of fiscal stimulus measures recently, up from three hikes. We expect strong growth and rising inflation to prompt the Fed to a faster pace of hikes than last year. The FOMC remains on track to raise rates by 25bps at the March meeting.
We expect Chair Powell to reflect the theme apparent in the January FOMC minutes and recent Fed official statements: there is upside risk to growth forecasts, yet risks around inflation forecasts are balanced and consequently a gradual pace of rate hikes remains appropriate. Our sense is that this is market consensus, especially as Powell will want to emphasize policy continuity in his first Congressional testimony as Chair. While not our base case the risk from this week’s testimony is that upgraded forecasts for growth and possibly inflation make Powell’s comments sound hawkish. We would not be surprised to see Powell acknowledge an outlook for stronger growth, especially given the significant fiscal stimulus implied by the recently passed two-year budget deal. More hawkish, and less likely, would be an explicit acknowledgement that four hikes in 2018 is becoming more probable. Rather, we expect Powell to use similar language to the January minutes, which indicated that stronger data makes the FOMC more confident in pursuing “further gradual increases.”
We think Chair Powell will touch on a few key points in the testimony and Q&A sessions. We expect to hear Chair Powell evince increased confidence about the US outlook due to the large dose of fiscal stimulus in the pipeline and characterize household spending, business investment, and labor market conditions as solid. Powell may reconcile fiscal stimulus and better expected economic outcomes yet an unchanged median policy path by voicing support for a modest overshoot of the inflation target and an undershoot of the unemployment rate. That said, we think it is far too early for Chair Powell to signal any change in policy. We also expect Powell to mention regulatory easing, especially for smaller community banks.
All eyes will be on Fed Chair Powell’s comments at his first semi-annual monetary policy testimony (formally known as Humphrey-Hawkins). He will start with a prepared speech which will be released in advance at 8:30, as has been the trend of late. The speech will likely have a similar tone as the FOMC minutes, noting that growth has picked up and the FOMC has become more convinced of continued momentum. In other words, risks have become more favorable. This naturally leads to a faster drop in the unemployment rate highlighting the tightening in the labor market. The consequence will be increasing inflation, although he will likely note that there is evidence that the Phillips Curve has flattened and there are constraints on how quickly inflation moves higher. On balance, we think Powell will sound cautiously optimistic, reiterating the need for patience when it comes to the hiking cycle. This will not be the place for Powell to hint at 4 hikes for this year. As such, the risk, in our view, is the market interprets his prepared remarks to be more dovish than anticipated.