Gradual Hikes “For Now” Is About Emphasizing Conditionality, Not Signaling Dovishness

Chairman Powell’s prepared remarks for his semiannual monetary policy testimony were largely consistent with his recent comments, though they were relatively watered down—not surprising, given the audience.  He reiterated that the economy is strong and the outlook is positive while emphasizing that there are significant uncertainties. He commented on trade only in very broad terms and avoided being seen as supporting any particular policy. He characterized the Fed’s balancing act in simple, even simplistic, terms.  He did not discuss in any depth in his prepared remarks key concepts such as estimates of neutral or sustainable levels of key variables. 

The most ambiguous aspect of the prepared remarks was perhaps the description of the FOMC’s view of the appropriate pace of rate hikes, in which Powell chose not to simply reiterate language from the FOMC’s postmeeting statement. In particular, Powell included the qualifying phrase “for now” in the description of  the FOMC’s prevailing expectation of the appropriate policy path (bolding our emphasis): 

With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that—for now—the best way forward is to keep gradually raising the federal funds rate. We are aware that, on the one hand, raising interest rates too slowly may lead to high inflation or financial market excesses. On the other hand, if we raise rates too rapidly, the economy could weaken and inflation could run persistently below our objective.  

In our view, “for now” does not necessarily signal a slower-than-anticipated pace of rate hikes. Rather, it was intended to underscore the conditional (or data-dependent) aspect of the FOMC’s rate-path plans. This is not a change in the FOMC’s inclinations since the June meeting. Another way of expressing this sentiment would be to describe this path as their “current” expectation, subject to changes in circumstances.  

During the Q&A part of the hearing, Senators’ questions were focused on wage growth, the effects of the recent tax bill, trade policy, and, of course, regulation. Powell was drawn into discussing some of these issues in greater depth. However, we still saw his comments as consistent with his previous remarks. 

Here’s a brief rundown of some of Powell’s comments. 

Powell continued to talk a lot about the benefits of a low unemployment rate and did not talk much about the  costs. 

▪ Senators asked him about wage growth repeatedly, and he argued that it has picked up a little, though less than expected even given low productivity growth.  

▪ In his prepared remarks, he noted that wages are growing “a little faster than they did a few years ago”  but slower than before the crisis, and that “moderate wage growth also tells us that that the job market  is not causing high inflation.” 

▪ He said “we certainly think it would be fine for [wages] to move up more.” 

▪ He defended the pace of tightening thus far and pretty much characterized it as dovish and very favorable to workers: “We have been supporting a strong labor market for a long time, despite many calls for us to raise interest rates much more quickly. I’m glad that we stayed in longer than that. And I think gradually raising rates is the way for us to extend this expansion. Nothing hurts working families and people at the  margin of the labor markets more than a recession.” 

Senators pressed him on trade, and his comments covered the key points made in the June FOMC minutes and his recent interview. 

▪ As in his recent interview, he expressed approval with the Administration’s stated aim of seeking lower tariffs for everyone, and he did not give his opinion on the Administration’s strategy for achieving that objective: “I would say in general countries that have remained open to trade, that haven’t erected barriers, including tariffs, have grown faster, had higher incomes, higher productivity, and countries that have, you know, gone in a more protectionist direction have done worse. I think that’s the empirical  result.” 

▪ He noted that the ultimate outcome could be positive or negative: “If it results in lower tariffs for everyone,  that would be a good thing for the economy. If it results in broader, higher tariffs across a broad range of traded goods and services that remain that way for a longer period of time, that will be bad for our economy and for other economies, too. 

▪ However, he noted, as did the June minutes, that there are already anecdotal reports of negative short-term impacts: “But we have heard a rising chorus of concern which now begins to speak of actual capex  plans being put on ice for the time being.” 

Powell was asked about the flattening of the yield curve and the implications of the shape of the yield curve.  His response was quite clear and consistent with his June press conference and the discussion in the June minutes. 

▪ “I think what really matters is what the neutral rate of interest is. And I think people look at the shape of the curve because they think that there is a message in longer-run rates, which reflect many things, but that longer-run rates also tell us something, along with other things, about what the longer-run neutral rate is. That’s really, I think, why the slope of the yield curve matters. So I look directly at that…in other words, if you raise short-term rates higher than long-term rates, then maybe your policy is tighter than you think, or it’s tight, anyway. So the shape of the curve is something we have talked about quite a  lot. Different people think about it in different ways. Some people think about it more than others. I think  about it as, the question being, what is that message from the longer-run rate about neutral rates.” 

▪ It appears that those who are more concerned about this have been especially vocal in their public remarks, but that the consensus is that there isn’t a reason to be greatly concerned about the shape of the yield curve is a strong recession signal. Powell is clearly part of that consensus. 

Powell was also asked about fiscal policy, particularly the tax bill, with Democrats and Republicans trying to score political points. Powell reiterated that there is expected to be a positive impact over the next few years,  but that the timing and size of those effects are highly uncertain and that the Fed looks at a wide range of estimates. 

▪ “We would expect that the tax bill and the spending bill would provide meaningful support to demand for at least the next two or three years, maybe three years, and also might have effects on the supply side as well. To the extent you’re encouraging more investment, you’re going to get higher productivity” 

(our emphasis). This is slightly less certain than in his interview last week, in which he expected the  “significant” support to last “at least the next three years.” 

▪ Powell was asked about a recent study (from a San Francisco Fed publication) that questioned the likely positive economic impact of the tax bill. He responded diplomatically: “And I would just say that there is a wide range of estimates of the effects of the recent fiscal changes…There’s a lot of uncertainty. One  of the great things about the Fed is we get a range of views, which is a healthy thing.” 

There was surprisingly little talk of inflation and topics like the Phillips curve—virtually none, actually. ▪ “Core inflation was 2.0% for the 12 months ending in May compared to 1½% a year ago. We will  continue to keep a close eye on inflation with the goal of keeping it near 2%.” 

▪ Powell noted that “For quite a while here, we have been in the range of achieving our maximum employment goal. And we are only just getting there with inflation. I wouldn’t declare victory on that yet  either.” ▪ He noted that higher energy prices have boosted headline inflation above 2 percent, but that core inflation has been more restrained.

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