If It Pleases The Court, Jerome Powell Would Rather Congress Didn’t Ask Him About The Trade War

Jerome Powell is on Capitol Hill on Tuesday (it’s Humphrey Hawkins week, in case you forgot),  and his testimony will be scrutinized heavily in light of the trade frictions and the prospect that a trade-related downturn in global growth could spill over and put the brakes on U.S. economic momentum.

Last week, in an interview with American Public Media’s “Marketplace” program, Powell was non-committal on the trade issue, but his comments in Sintra as well as the June Fed minutes reflect some consternation about the balance of risks.

Generally speaking, his assessment of the economy will be characteristically upbeat, but as BofAML notes, “the more interesting take may come from his assessment on the risk to the economy, especially around tariffs.”

Traders will also look for any clarity around the evolution of IOER tweaks. That issue is set to become more important, despite the technical nature of the discussion. For their part, Morgan Stanley thinks it will factor into a decision to halt balance sheet rundown earlier than consensus expects.

In his statement to the committee on Tuesday morning, Powell described the job market as “strong,” and the economy as having grown at a “solid pace” in 2018. He characterized recent inflation data as “encouraging”. The latest read on CPI showed inflation in the U.S. hitting a new six-year high, even as the print was marginally weaker than consensus.

The June jobs reported suggested there’s still some slack in the economy as average hourly earnings missed estimates. “Wage growth isn’t as strong as it was pre-crisis, but that shows the job market isn’t causing high inflation,” Powell said Tuesday.

Here are some other highlights from the Fed chair’s testimony:

• “With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that — for now — the best way forward is to keep gradually raising the federal funds rate”.
• Balance sheet normalization is “running smoothly”.
• Fiscal policy in the U.S. should prolong the expansion, although it will be hard to predict “the size and timing of the economic effects of the recent changes in fiscal policy”.
• “Looking ahead, my colleagues on the FOMC and I expect that, with appropriate monetary policy, the job market will remain strong and inflation will stay near 2 percent over the next several years.”

Notably, his prepared remarks contain only one reference to the burgeoning trade war:

It is difficult to predict the ultimate outcome of current discussions over trade policy.

It sure is, Jerome. It sure is.