Powell’s Confirmation Hearing: Continuity Above All

Powell’s answers to questions from senators were consistent with the notion that he will likely conduct monetary policy in a manner similar to Chair Yellen.  

Consistent with the FOMC’s (and Yellen’s) recent pronouncements, Powell reiterated that “to continue on this path of gradual rate increases” would be “the best way” to ensure that the recovery continues. ▪ Echoing Yellen’s recent comments, Powell warned of risks on both sides. 

▪ Waiting too long to hike would risk overheating the economy, which would require more rapid hikes and  risk a recession: “We’re raising rates now because the economy is strong.” 

▪ He argued that it’s now “time for us to be normalizing” the fund’s rate and the balance sheet. ▪ However, he also argued that it is “really important” to preserve the credibility of the Fed’s 2% inflation objective.  

▪ He concluded that “conditions are supportive” for a further rate hike. He said, “I think that the case for raising interest rates at our next meeting [December] is coming together,” though he tactfully noted that this is a decision undertaken by the entire Committee. Done deal!  

▪ When asked about his expectations for growth this year, he said he saw around 2½% growth this year.  He added that “As you look forward, [he] would expect something pretty close to that.” That’s above participants’ median projection in September (2.4% for 2017 and 2.1% for 2018), and is a signal of the size of the upward revision likely to come in the December projections. We agree.  

▪ He also said that “we are looking at an economy that’s going to go below 4% unemployment.” This is lower than the lowest point in the median September projections and likely presages a downward revision in the unemployment rate from 4.1% to under 4.0% in December. Our low point is closer to 3½%. 

Powell described the debate about the recent weakness in inflation, expressing concern but for keeping his own views guarded. 

▪ “Lately, inflation was moving up,” but “to my surprise, to all of our surprises, I believe, inflation readings  started to come in weak.” 

▪ He noted that the FOMC is still grappling with whether the recent shortfall is the result of transitory factors. It remains an open question whether there are “more fundamental things at work here.” ▪ He said that the FOMC will closely follow the incoming data and “can afford to go more slowly” if the weakness in inflation is more persistent. 

Powell saw the current labor market as healthy but stopped short of declaring a state of full employment. ▪ He warned that the concept of maximum employment is “kind of an imprecise thing.” ▪ He observed that the current unemployment rate (4.1%) “is at or around or even below many estimates”  of the NAIRU. 

▪ However, he also pointed out that there are “other dimensions.” For example, the labor force participation  rate of prime-age males suggests there might be some room for more workers to return to the labor force. ▪ Regarding wage growth, he thought the data gave “no sense of an overheating economy.” 

▪ He argued that what the Fed is able to do is to “push harder on maximum employment.” Senators were keen to hear his views on the impact of recent fiscal proposals as well as other political issues.  Powell mostly declined to answer these questions. 

▪ “That’s not really our role [to score fiscal proposals], and I don’t have a forecast for you on that today.” ▪ He did argue that “it is important that we have a long-run focus on increasing our sustainable growth  rate.” He saw maximizing the labor force as key. However, “productivity is very, very difficult to forecast.”  He noted that many of the relevant policies fall under Congress’s purview. 

▪ In response to worries of political pressure from the White House, Powell stated that “nothing in my  conversations with anyone in the Administration has given any concern on that front.” 

The configuration of the Fed’s balance sheet during and after the current period of normalization was also of interest to senators. 

▪ Powell saw the securities portfolio as shrinking to a range of $2.5 trillion to $3 trillion, which is similar to what he said in June.  

▪ He reiterated that ultimately “It will be no larger than it needs to be for us to conduct monetary policy.”  ▪ Earlier he had noted that the normalized size would depend on the long-run operating framework. Good judgment to not go there today! The Committee has not yet made a final decision on the framework. ▪ It would take three or four years “before we reach a stable level of the balance sheet.” ▪ It was his assessment that the Fed laid out the plan “very clearly” and “the market has accepted it.” 

The Fed’s regulatory responsibilities were also in the spotlight. 

▪ All in all, Powell’s inclinations on the regulatory side appear to be “preserving the core reforms” while easing some of the burdens on smaller institutions. 

▪ He faced questions from Democrats on the degree of deregulation he would support. He said that he  intended to operate the Fed based on its mandates and not on political considerations. ▪ “Generally,” he saw the framework of the proposed bipartisan financial regulation overhaul legislation as  “workable” and “sensible.” 

▪ He also supported a “rewrite” of the Volcker Rule, in a manner “faithful to both the language and the intent” of Dodd-Frank. He favored “tailoring” its application. 

▪ He did note that the currently “healthy” economy provided a good opportunity to make progress on  housing finance reform, which he saw as “unfinished business.” 

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