Powell’s Testimony

Fed Chairman Jerome Powell will deliver his semi-annual monetary policy testimony to Congress on Tuesday and Wednesday, but he’s not expected to cover any new ground. In the past, this testimony was often a big deal for the financial markets. However, the Fed has become more transparent over the years. We have the Fed’s Monetary Policy Report in hand (released on Friday). We have the Fed’s Summary of Economic Projections (forecasts of growth, inflation, unemployment, and the revised dot plot). Powell delivered a post-FOMC press conference. He sat down for a Marketplace interview last Thursday, which provided a lot more insight into his approach. Still, there are a number of uncertainties in the outlook. For example, how much slack remains in the labor market? The bigger question is how the Fed views the risks from trade policy. To date, Powell has indicated that the Fed is watching things closely, but consumer and business concerns about trade policy are increasing rapidly.

As Powell noted in his post-FOMC press conference on June 13, “the economy is doing very well – most people who want to find jobs are finding them, and unemployment and inflation are low.” The Fed expects that fiscal policy (tax cuts and added spending) will continue to support economic growth this year and next.

In his Marketplace interview, Powell said that the Fed “doesn’t directly look so much at wages as we do price inflation,” but is “looking very carefully at maximum employment as one of the things that pushes up wage and price inflation.” Powell said it is “a bit of a puzzle” (not a “mystery”) why wages aren’t rising at a faster pace, but points to lackluster productivity growth as a possible culprit. Still, prices should go up as markets tighten, “and I think we’re starting to see that.”

The PCE Price Index rose 2.0% over the 12 months ending in May, matching the Fed’s goal. That estimate is subject to change when comprehensive benchmark revisions are released (July 27), but it’s too soon to declare victory according to Powell (“we want inflation to be symmetrically around 2% -- just reaching up and touching it once doesn’t fulfill that goal”).

Powell is aware of the risks of overshooting on monetary policy. “If we leave rates too low for too long, then we can have high inflation or we can have asset bubbles or housing bubbles. If we move too quickly, then we can unintentionally put the economy into a recession or cut off the return of inflation at 2%. So we’re always balancing those two things.” This balancing act wasn’t much of a concern for the last several years, but is more important as policy nears a neutral level.

The Fed’s Monetary Policy Report provides a comprehensive look at the overall economy. However two key themes, which were also included in the June 13 policy statement, stand out. The first is that Fed officials still see the stance of monetary policy as “accommodative” even after the June rate hike. That means there is a little more work to do to get to normal. The second is that conditions are expected to warrant only gradual increases in short-term rates. Officials still see some slack in the job market, which means that they can afford to take their time. However, as we saw in the revised dot plot, policymakers are divided on whether there will be one or two more rate increases in the second half of 2018.