Jerome Powell reinforced the message that monetary policy is generally in a “good place” in his opening statement to the Joint Economic Committee of Congress on Wednesday, but he was also careful to come across as cautious and vigilant, in an apparent bid to avoid upsetting any apple carts.
“We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market, and inflation near our symmetric 2% objective”, Powell says in the text (embedded in full below).
The Fed chair’s characterization of policy as being “appropriate” during the post-FOMC press conference last month was widely interpreted to mean the Fed would prefer to hold off on further rate cuts after the third move in as many meetings. Anything beyond the third cut in October would seriously undermine the characterization of the cuts as a “mid-cycle adjustment”.
Read more: Jay Powell’s ‘Good Place’ Monetary Policy Sets Up Election Year Clash With White House
Trade tensions have eased and the data has improved since the summer, giving the Fed scope to pause, but the White House continues to pressure policymakers. On Tuesday, during remarks in New York, Donald Trump blamed the Fed for putting the US at a disadvantage and implored Powell to cut rates into negative territory.
“Gimmie some of that money”, Trump actually said, referencing negative rates in Europe and Japan.
In his prepared remarks to Congress on Wednesday, Powell does strike a cautious tone, citing “sluggish growth abroad and trade developments” as factors which “have weighed on the economy and pose ongoing risks”. One is reminded of this:
Inflation pressures, Powell says, “remain muted”. Hours before the Fed chair was scheduled to appear on Capitol Hill, the latest read on consumer prices showed the core index coming in cooler than expected for October, providing cover for policy accommodation.
Powell also reiterated that the Fed stands ready to respond “if developments emerge that cause a material reassessment of our outlook”. That language – the “material reassessment” bit – is fodder for much debate on Wall Street and among Fed watchers in general. What, everyone wants to know, would constitute cause for a “material reassessment”?
The Fed chair also parroted his usual cautionary tone on America’s fiscal trajectory. “Putting the federal budget on a sustainable path would aid the long-term vigor of the US economy and help ensure that policy makers have the space to use fiscal policy to assist in stabilizing the economy if it weakens”, he says.
As far as markets go, Powell calls financial vulnerabilities “moderate” and describes investor risk appetite as “within a normal range”.
That latter bit will serve as an excuse for everyone to roll out generic charts of the S&P at record highs on the way to making tired, old jokes about what’s “normal” and what isn’t. For what it’s worth, here’s a forward P/E chart for both the aggregate index and the median stock:
(Goldman)
Stretched? Maybe. Ridiculous? No. Not by a long shot.
Finally, Powell reiterates that he and his colleagues “see a sustained expansion of economic activity, a strong labor market, and inflation near our symmetric 2% objective as most likely”.
Thanks for the S&P PE chart. It would be interesting to see it showing actual cash profits rather than EPS, so striping out the impact of buy-backs on EPS. But then, buy-backs are the reality. Perma-bears need to wake up to that fact on the ground.