The most significant event this week will be Chairman Powell’s semiannual testimony before Congress on Tuesday and Wednesday. We expect the Chairman to highlight the strength of the economic outlook while emphasizing the uncertainties (click here for our preview). We don’t expect Powell’s prepared remarks for the semiannual testimony to deviate from his June FOMC press conference, the July FOMC minutes, and, most importantly, his recent interview.
Recent Policymaker Remarks
Last week, Powell gave an interview that likely provided a preview of the tone of his remarks before Congress this week. His assessment of the U.S. economy is that it is in “a good place from a cyclical standpoint close to our maximum employment and stable prices target. I think the banking system is well capitalized and much safer, better managed than it was.”
Powell’s interview also covered key current policy debates. He noted that “there is still a bit of a puzzle” in that the pace of wage growth has not picked up as much as might be expected given other indicators pointing to a tight labor market. He also appeared to see some potential for a further cyclical rise in the labor force participation rate. On the 2 percent inflation objective, he argued that “we’re really close to our target. I wouldn’t say we’ve fully achieved it yet. We’re not declaring victory there.” He warned of the inherent uncertainty of economic forecasts and estimates of neutral levels of key variables in particular: “It’s not like the fact that water boils at 212 degrees. The economy doesn’t boil at 4 percent unemployment. It’s very hard to say these things. So if it’s coming across as a little bit less certain then I would say it’s working.” On fiscal policy, Powell regarded recent changes as providing “significant support for, demand for economic activity probably for at least the next three years.” What’s less certain are the longer-term effects on the supply side.
Trade risk continued to be a key topic capturing the attention of other Fed policymakers, who generally regarded the U.S. economy as quite strong. For the moment, the approach appears to be to regard trade risk as a downside risk; without more certainty about specific trade actions and their consequences, it would be premature to include it in the baseline outlook. Kaplan noted that “What’s going on in the short-run certainly isn’t positive, but for me it isn’t sufficient yet – yet – to materially change my outlook” (Jul 13). Evans also said that trade could be a potential headwind, “but the strength of the economy is really pretty important at the moment…The fundamentals for the U.S. economy are very strong” (Jul 11). Bostic reiterated the observation from the June FOMC minutes that there were anecdotal reports of businesses delaying certain investments as a result of concern over tariffs (Jul 13).