Powell On Parade

One of the enduring amusements of mainstream financial media coverage is the charade whereby known non-events ride shotgun with top billing only to be booted onto the highway at high speed the moment they’re no longer useful as above-the-fold placeholders in the absence of real news.

For most of the US holiday weekend, Jerome Powell’s congressional testimony (scheduled for mid-week) was described in terms which suggested he might say something pivotal. “Markets muted with US on holiday, Powell eyed” a Monday headline might’ve read. Then, on Tuesday: “Rally stalls as traders await Powell.”

Come Wednesday, the first air of a new summer was heavy with suspense. You could cut the tension with that bar knife the hotel staff is using to carve up a lime for the Bombay you’re counting on to wash away a hangover incurred at great expense Tuesday evening, the fourth night of your third vacation this year.

In case you’re not picking up on the sarcasm, there was no suspense. There was no chance that Powell would offer anything new on Wednesday, or at least not in his prepared remarks. How could he? We just heard from him five business days ago after the June FOMC meeting. Exactly nothing has happened since then, or at least nothing that’s material for monetary policy.

As discussed (read: lamented) here in “The Honorable Mr. Powell,” the sole purpose of this week’s proceedings is to provide US lawmakers with an opportunity to forcibly enlist the Fed chair in the circus that is America’s obsession with grievance politics. And that’s precisely what’ll happen. The saving grace for the financial media (both mainstream and otherwise) is that the associated soundbites will be eminently monetizable, particularly on Thursday, when Powell chats with the Senate. Such soundbites will be turned into tweets and written up as news. You’ll engage with the tweets, and read the write ups, and in the process, you’ll pay Elon Musk, Bloomberg, the Journal and FT a penny or two, if only by glancing at an ad. You’ll also be co-opted into the country’s increasingly toxic political debate.

That’s not to say Powell won’t accidentally move markets. After all, he’s compelled to respond to lawmakers’ queries, and some of those queries will be related to inflation and the Fed’s belabored efforts to control it. But generally speaking, the plan was to stick to the script. Assiduously and almost literally. As Journal “Fed whisperer” Nick Timiraos noted on Wednesday, “Powell’s prepared testimony to Congress contain[ed] almost no new language compared to his opening statement at last week’s news conference.”

“My colleagues and I understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2% goal,” Powell told America’s politicians. He reiterated that without price stability, “the economy does not work for anyone” and as ever, he was keen to square the proverbial circle by insisting that high inflation isn’t consistent with sustainable labor market strength.

“Inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go,” he went on. (So, it’s not transitory then?)

He claimed QT is running at a “brisk” pace, a characterization that not everyone would necessarily agree with, although “brisk” is in the eye of the beholder, and you have to exclude borrowing associated with the Fed’s efforts to provide liquidity to the banking sector if you want a “clean” read on the situation.

It’ll take some time, Powell said, for “the full effects of monetary restraint to be realized, especially on inflation.” “Nearly” all Fed officials expect more rate hikes by the end of the year.

And that was pretty much it. Powell subsequently said the decision to pause in June was “entirely consistent” with the new dot plot, which of course tipped two additional hikes by year-end. He said it might make sense to move at a more measured pace going forward. All in all, there was nothing to be gleaned on the rates trajectory beyond what was contained in the new SEP and what Powell told reporters a week ago.

Try as they might, it was unlikely that Republicans would succeed in coercing Powell to offer implicit criticism of the Biden administration’s fiscal policies. On the other side of the aisle, it was equally unlikely that Democrats would extract any sort of overt promises on the labor market given the still very low jobless rate and core inflation that’s projected to average double the Fed’s target for the rest of the year.

The Fed, Powell conceded, is “very far” from its inflation target. I’d gently suggest a (partial) explanation: Notwithstanding the New York Fed’s most recent efforts, r-star could be misestimated. Put differently, the Fed may be “very far” from its inflation target because the Fed is still “a long way from neutral.”