The House Financial Services Committee has shifted Fed Chair Powell’s monetary policy testimony to Tuesday, February 27.
Jerome Powell has been a Fed governor since May 2012 and has given plenty of speeches. However, this will be his first major appearance as chair, so financial market participants will be paying much closer attention. His prepared testimony will be released before the actual hearing, but investors will want to observe the body language. In the end, we’re unlikely to learn much of what we don’t already know. Further increases in short-term interest rates should be anticipated and the pace will remain data-dependent, or as the Fed puts it, “the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
Traditionally, the Fed released its Monetary Policy Report to Congress at the same time as the chair’s testimony, but in recent years the report has been released the week before (to allow lawmakers some time to analyze it). While widely ignored by the financial markets, the MPR is a detailed assessment of the current economic situation, the outlook, and the monetary policy framework, and provides the basis for the chair’s testimony. Although a bit dated (it reflects where things were at the end of January), the report presents the Fed’s official views on a number of important issues and uncertainties.
No surprise, the labor market is a key focus for the Fed’s monetary policy decisions. The Fed notes the while job growth was slightly slower in 2017, “the pace has remained considerably faster than what is needed, on average, to absorb new entrants into the labor force.” The unemployment rate, at 4.1% in January, is “somewhat below the median of FOMC participants’ estimates of its longer-run normal level,” and “other measures of labor utilization also suggest that the labor market has tightened since last summer.” Wage growth has been moderate, notes the Fed, “likely held down in part by the weak pace of productivity growth in recent years.”
The Fed recognizes that consumer price inflation has remained below the FOMC’s longer-run objective of 2% (the core PCE Price Index rose 1.5% y/y in 2017). However, readings on core inflation were somewhat higher during the second half of last year. The Fed notes that “measures of longer-run inflation expectations have, on balance, been generally stable, although some measures remain low by historical standards.”
The report indicates that consumer spending “expanded at a solid rate in the second half (of 2017), supported by job gains, rising household wealth, and favorable consumer sentiment.” Business investment growth was “robust, and indicators of business sentiment have been strong.” The housing market has continued to improve “slowly.” Foreign activity “remained solid,” but “net exports subtracted from real U.S. GDP growth as imports of consumer and capital goods surged late in the year.”