Powell will take part, along with Yellen and Bernanke, in a joint interview (video link) conducted by Neil Irwin of The New York Times tomorrow (Friday, Jan. 4) at 10:15 a.m. These will be Powell’s first public remarks since his press conference after the December 2018 FOMC meeting (analysis here), although William’s CNBC interview shortly thereafter was widely interpreted as an attempt to soften Powell’s comments (analysis here). While the intended focus of the panel was probably a discussion of general strategy issues (such a longer-run policy strategy, especially under the circumstances of the zero lower bound and disinflation), it is inevitable that the audience will instead be focused on any changes in Powell’s description of the immediate policy stance.
Powell will likely strike a softer tone than he did at his December presser (“a risk-off feeling in the stock market as well…we don’t know whether that’ll persist”). However, he will not abandon the general position that tighter financial conditions, even with the further drawdown, “have not fundamentally altered the outlook” despite being “less supportive of growth.” As for the U.S. government shutdown, policymakers likely assume it will be resolved without fundamentally altering the outlook. He won’t say too much about the shutdown and will be loathed to signal that it will result in easier monetary policy.
He will probably echo the sentiment of the new language in the statement saying that the FOMC “will continue to monitor global economic and financial developments and assess their implications for the economic outlook” and regard that as a sufficient explanation. The criterion he provided for adjusting the broader outlook was “material changes in a broad range of financial conditions that are sustained for a period of time.” He’ll be quite hesitant to draw any links between current financial conditions and balance sheet policy, although he will be probed on that. He will also be careful not to overstate the impact of the news of softening in some foreign economies, notably China, so as to prevent a further collapse in rate-hike expectations. As usual, he will emphasize that the Fed’s dual mandate relates to U.S. economic conditions. Though he will acknowledge that global conditions feed through to U.S. economic conditions, markets may interpret his comments as hawkish if he comes off as too dismissive.
The possible inversion of the yield curve could be a focus. He is unlikely to depart from his previous stance that inversions don’t directly cause recessions and that the implications are not what they were in the past because of how low-term premiums are. Another topic related to market pricing that may be broached is the decline in breakeven inflation measures derived from Treasury yields. He won’t dismiss entirely concerns about low inflation expectations, but he’ll be careful not to signal a significant increase in concern, especially since there was no mention of lower market-based inflation compensation in the December postmeeting statement or press conference. Powell will likely point to the stability of the survey measures and perhaps the recent softness in oil prices.
The market is already expecting less tightening than the two hikes implied by the SEP median, and comments from policymakers like those from Kaplan encourage such expectations. Kaplan advocated for a prolonged pause today, suggesting the FOMC should forgo rate hikes in the “first couple of quarters of this year.” Clarida
recently argued that “inefficient divergences between public expectations and central bank intentions for the policy rate path can emerge and persist in ways that are costly to the economy when reversed.” In line with Clarida’s thinking, Powell will likely be careful not to push market expectations down any further. The most recent data will also provide an interesting backdrop. Today’s ISM data were quite a bit weaker. But the employment report (published immediately before Powell appears) probably will not be as soft. If Powell maintains an overall rosy outlook, despite continued volatility in financial markets and some weaker data, it would signal that multiple further hikes (SEP median) remain the preferred course, and his remarks would likely be interpreted as hawkish.
In addition to tomorrow’s remarks, the FOMC minutes will be published on Wednesday, January 9, and Powell and Clarida will speak on Thursday, January 10.