Powell JEC Testimony: No Need to Fine-Tune or Update the FOMC’s Message

Powell’s testimony today before the Joint Economic Committee made clear that he was pleased with the results of the October FOMC meeting—both the message presented by the FOMC and the way that message was received—and saw no need for fine-tuning. The prepared remarks for Powell’s testimony mirrored very closely the sentiment of his October FOMC press conference and comments by other policymakers thereafter:  “We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market, and inflation near our symmetric 2 percent objective.” This came with the general warning that “if developments emerge that cause a material reassessment of our outlook, we would respond accordingly.  The policy is not on a preset course.” When asked about whether this stance amounted to a pause in the interest rate  that would last through 2020, he said, “I wouldn’t say that at all.” He then referred explicitly to his prepared remarks and repeated the language used there. 

Powell was upbeat on the trajectory of the U.S. economy. He was pleased to state that the economy is in “a  very good place” but wanted to emphasize that the priority is to “keep it there” given the risks from “slowing global growth,” especially in manufacturing. He noted that the upbeat outlook depended on a virtuous cycle of continued job creation “at a solid level,” high household confidence, and growing wages. 

However, “noteworthy risks” to the Fed’s favorable outlook remain. In his view, “sluggish growth abroad and trade developments” both “have weighed” on the economy and “pose ongoing risks” to the outlook. Powell was of course very careful about how he talked about the role of trade policy uncertainty. When asked directly about this, he replied: “So we have been hearing, now, for a year and a half, from companies—and I think this is fairly widely accepted now—that tariffs, but to an even greater extent, uncertainty around future trade policy is, for now, it has been weighing on business sentiment and is probably part of the global slowdown in manufacturing, in business investment, in exports, in trade, part of the story. There’s a much bigger story  out there, but it’s a part of that.” 

Inflation was not a major focus in this testimony. Powell warned that “persistent below-target inflation” could threaten the stability of longer-term inflation expectations. Those expectations are “at the lower end of their  historical range.” There was absolutely no concern about excessively high inflation. 

Regarding the labor market, he was “very open” to the idea that “we don’t know where maximum employment  precisely is.” He said, “We have to have significant humility when we make estimates of that, and we’ve got  to let the data speak to us.” He was very clear about what the data were saying: “the data are not sending  any signal that the labor market is so hot or that inflation is moving up or anything like that.” Rather, “what  we’ve learned is that the current level of unemployment is consistent with a strong labor market, but it is not  one that is in any way presenting difficulties and it has many beneficial side effects, including pulling people  back into the labor market, including wages moving up for people at the lower end of the wage spectrum.”  Many of the questions touched on labor market issues, particularly wage growth, and Powell consistently reiterated that the Fed fully welcomes and sees no reason to lean against a strong labor market and rising wages in particular. When asked why wages aren’t growing faster, he replied that “wages should ultimately  

equal inflation plus productivity, and that’s right about where we are.” But he also suggested that there are other possible explanations, including that there’s still slack in the labor market or that the neutral rate of interest may be lower than thought. When asked why wage growth slowed somewhat over the last year after  firming earlier in the expansion, he admitted that “I’m not at all sure why that is, it may be compositional  effects…but in any case, it’s consistent with this idea that we’re not seeing excessive tightness in the labor  market that’s generating outsize wage gains.” 

As for the framework review, Powell repeated that the Fed will report the results when they finish the review,  which is likely around mid-2020. He also used this opportunity to remind the Congress of the importance of countercyclical fiscal policy while repeating his appeal for fiscal sustainability in the longer run. Powell  highlighted the supportive role that fiscal policy must play in the event of a downturn: “In a downturn, it  would also be important for fiscal policy to support the economy.” Relatedly, Powell pushed back strongly  against the idea that low longer-term interest rates were a license for increasing deficit spending: “it does not  mean we can ignore deficits at all.” 

Financial stability was not a focus of this hearing, but in his prepared remarks Powell did seem to preview the  Fed’s Financial Stability Report that will be released later this week when he said that “the overall level of  vulnerabilities facing the financial system has remained at a moderate level.” 

Powell received a number of questions less directly related to monetary policy, for example on climate change,  minimum wage laws, and social inequality. For example, while he was sympathetic to the notion that different groups experience different inflation rates based on what they consume, he stopped short of endorsing any  Fed response beyond research. He saw climate change as a worthy topic for research at this point, but not as likely to have any effect on the current setting of monetary policy. 

Powell also encountered questions about the possibility of negative policy rates. On the eve of Powell’s testimony, President Trump gave remarks in which he expressed his desire for lower policy rates. Powell responded to the lawmaker’s question by noting that negative rates are not currently an appropriate setting for the U.S. economy. 

Powell also declined to comment on dollar policy, conforming to the long-standing protocol that the U.S. dollar is the province of the Treasury and not the Fed. 

Powell reassured lawmakers that the Fed has a handle on recent money market disruptions, saying they “have  it under control.” He stressed that the policy measures were “technical” and “doesn’t really have implications  for the economy.”

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