Powell’s first hearing as Fed Chair must be judged a success by any reasonable standard. While he avoided providing any explicit guidance on the pace of rate hikes, his characterization of the outlook as strong and having improved since the December meeting certainly suggested that a faster pace is more likely than a slower pace. This is consistent with our view that the consensus on the FOMC has begun to shift from three rate hikes this year to four. And his comments, including in his prepared remarks as well as the Q&A, leave us quite comfortable with our expectation of four hikes this year. Below we discuss his testimony in more detail. The first four subheadings come directly from our preview piece and correspond to the key themes for the testimony that we highlighted.
Reassure the Oversight Committee About Your Leadership
In his first testimony as Chair, Powell played the part well. He had full command of the monetary and regulatory issues covered by the Fed. And on fiscal issues, he went as far as he could without intruding into political matters or falling into any political traps. Most important for his first outing, he did not rock the monetary policy boat in any meaningful way. That bodes well for his performance at the March press conference. While representatives’ questions were quite pointed at times, he managed the tension about as gracefully as could have been expected.
Navigate the Tension Between the Evolving Outlook and the Unchanged Policy Guidance As we anticipated, Powell stressed that he did not want to discuss how changes in the outlook would affect the path of monetary policy, as that would be up to the entire Committee. However, he was quite direct and clear about how his personal views on the outlook had changed: “My personal outlook for the economy has strengthened since December.” He elaborated:
Since then, what we’ve seen is incoming data that suggests a strengthening in the economy. We’ve seen continuing strength in the labor market. We’ve seen some data that will, in my case, add some confidence to my view that inflation is moving up to target. We’ve also seen continued strength around the globe, and we’ve seen fiscal policy become more stimulative.
This was how we expected him to handle the tension between an outlook that has continued to strengthen and FOMC communication that has become stale (minutes of the January meeting) or extremely stale (that from the December meeting). We anticipated that his discussion of the improved outlook would likely be interpreted as a somewhat hawkish signal by the market, and that was indeed the case.
The Stock Market Correction: A “Powell Put”?
As expected, Powell downplayed the recent decline in equity prices. Indeed, although he alluded to the recent decline in his prepared remarks, he did not specifically refer to equity prices at all. He said that “After easing substantially during 2017, financial conditions in the United States have reversed some of that easing.” His message: “Despite the recent volatility, financial conditions remain accommodative.” In the Q&A part of the testimony he responded to a question specifically on equities, saying that the Fed doesn’t “manage the stock market” (so, no “Powell put”) while acknowledging that it is a factor considered as part of the outlook.
Clarifying the Implications of a Symmetric Inflation Objective
Powell reiterated the symmetric nature of the 2% inflation objective in response to a question about possible changes to the 2% objective. He added that the FOMC would be concerned by “sustained or persistent” deviations from the objective. Powell stressed that “the market understands” the inflation framework well.
When asked what unemployment rate would correspond to maximum employment, Powell said, “If I had to make an estimate it’s somewhere in the low fours…but it could be five or it could be three and a half.” We were a bit surprised that he allowed himself to be pinned down to even a rough number, especially given that he appeared to be diverging from FOMC participants’ projections (the median projection is 4½%). But nobody pressed him on that estimate, and he later cited participants’ median estimate in “the mid fours,” saying, “that sounds right to me.” In any event, he appears to believe it likely that we are at or beyond the natural rate. He was also pressed frequently on wage growth, saying he would have expected firmer wage growth by now and that he still expects some firming. However, he also noted that wage growth is correlated with productivity growth, which has been weak.
Balance Sheet Policy and Operating Framework
Powell did not depart from established FOMC communication on the configuration of the Fed’s balance sheet. He reiterated the FOMC’s intention to return to a balance sheet “no larger than it needs to be to conduct” policy and that it would be composed primarily of Treasury securities. Several members of Congress criticized the use of IOER. Powell reiterated that the “current approach seems to be working very well. It gives us control over rates and the market seems to understand it.” However, the longer-run operating framework remained an open question. He said that the Fed had made no decision on its longer-run operating framework with respect to the balance sheet, and added that he didn’t expect the FOMC to make a decision in the “near term.” He agreed with a member of Congress characterizing his view of the new equilibrium size as $2.5 to $3 trillion, to be reached over three to four years. He added that he had “little inclination” to change the general parameters of the runoff plan. On the efficacy of asset purchases in general, he expressed confidence in quantitative easing: “I do think our post-crisis policies were effective.” He noted that studies “overwhelmingly” find that QE effectively lowered longer-term rates via the term premium.
Financial Stability We’ve seen Powell as one of the FOMC participants who in recent years has been more focused on financial stability issues. In his first hearing as Chair, he made no suggestion that such concerns are prominent in his current thinking, however: He saw the banking system as “very resilient” and said that the current outlook for financial stability shows “at most modest risks.” As for a suggestion from a representative that, if a yield curve inversion indicates a higher likelihood of a recession, perhaps the Fed should respond by selling assets to prop up the longer end of the curve, Powell responded that the phenomenon of yield curve inversions preceding recessions was generally a result of rapid funds rate hikes being needed to dampen inflation, which is different from the current situation.