Similar Dovish Message, But Could Hint July Might Be Too Early

Powell will testify before the House Financial Services Committee on Wednesday, July 10, and again before the Senate Banking Committee on Thursday. He will read a prepared statement and then take questions. His remarks will be watched carefully for any information about the likelihood of a July cut. Such hints would be apparent in his assessment of the U.S. outlook and balance of risks. The Monetary Policy Report was published on Friday morning, after the June employment report (which we covered in a note). 

Powell’s most recent speech and Q&A reinforced our call that there is a high probability of a rate cut at either the July or September FOMC meeting. After the strong June jobs report, we still expect a July cut, but we now see the timing of a cut as a somewhat closer call between July and September. The market, in contrast,  assigns a higher probability to a cut in July, and Powell’s comments will be interpreted in that context. While we think his message will be similar to what he’s presented recently–consistent with a cut in either July or  September–his testimony this week is a good opportunity for him to push back somewhat against the market’s conviction that a cut is likely to come so soon. If he’s asked about market pricing indicating a high probability of a near-term rate cut, which he likely will be, he’s likely to say that the FOMC has not made any decisions and will assess a broad range of data when it meets later this month. 

At the June FOMC meeting and shortly thereafter, he noted that the FOMC didn’t want to react too strongly to very recent developments that might not be sustained: “we’re not in the business reality of trying to work with short-term movements in financial conditions. We have to look through that and look to the—really the  underlying economy for our main guidance.” Now that a few weeks have passed, one thing we’ll be watching for is any change in how he talks about needing to wait to see if developments are sustained, which could indicate whether the FOMC will be ready to move as soon as later this month. 

His comments on the economic outlook will likely stay largely in line with his most recent remarks as well as the Monetary Policy Report. The latter noted that “Since the beginning of May, the tenor of incoming  information on economic activity, on balance, has become somewhat more downbeat and uncertainties about  the economic outlook have increased.” At CFR, he said the economy had performed “reasonably well,” and  “solid” fundamentals were supporting growth and “strong” job creation. He acknowledged inflation was below the 2% objective but remained hopeful that it would pick up based on “solid” growth and a “strong” labor market. However, “crosscurrents” associated with trade tensions and mixed incoming data were becoming a  greater concern. He mentioned initial signs of business investment slowing. 

Labor market issues are likely to feature as a bright spot in Powell’s testimony. However, his positive remarks on the labor market need not necessarily be interpreted as hawkish. It is important to note that the weak employment report for May was not the primary driver of the FOMC’s dovish pivot at the June FOMC meeting,  and Powell has consistently spoken positively about the labor market. He will likely place particular emphasis on the strong labor market bringing people into the labor force and reiterate that the wage growth picture does not indicate any overheating risk. 

Rather than the labor market is a primary concern, the message from the June FOMC meeting and subsequent remarks were that the FOMC would be inclined to ease if elevated uncertainty about trade and the global economy persisted. That is certainly still the case, even after outcomes were recently avoided in the  U.S.-China trade dispute that would have involved sharply higher tariffs in the near term. Powell may welcome that recent development, but he will be clear that prospects for trade policy remain a large source of uncertainty. In addition, the global economic data have continued to come in weak. While the U.S. data haven’t been as bleak, they have been soft, pointing to sharply lower real GDP growth in Q2. Other factors that reinforced the inclination to ease are also still in effect: The yield curve remains inverted, inflation remains below its objective, market-based measures of inflation expectations remain worryingly low, and overheating remains a remote concern. So while Powell may push back against a July cut being a done deal, he’s likely to suggest that uncertainties and concerns about the outlook remain much the same as they did at the June meeting. 

Another item to look out for is whether he says (for a third time) “an ounce of prevention is worth a pound  of cure.” He’s said this both during the June presser and later at CFR. Though he was talking in general terms about the benefits of eating earlier in a downturn to avoid being constrained by the ELB, his repeated use of this phrase sparked speculation that he was signaling an inclination to cut in July. 

As for the balance sheet, he might get questions about the planned balance sheet reduction and subsequent plan to maintain a large balance sheet for the sake of ample reserves. He will likely offer little further information beyond the FOMC’s consensus statement on balance sheet plans. One current disagreement among policymakers is whether balance sheet reduction should be allowed to continue even if there is a rate cut before the previously announced end. Powell suggested that runoff might cease, but at least two other  FOMC participants have said that they saw no need to terminate runoff before its scheduled end. 

Powell will likely be grilled on the progress of the framework review and be asked to address some concerns.  In particular, there is probably some worry that price-level targeting and other ideas would amount to backdoor ways of effecting a higher inflation goal. He’s faced these questions many times now, and he’s unlikely to say anything new this week. He will explain that the motivation for the review is the problem associated with the effective lower bound and ensuring that the FOMC is able to effectively meet its current inflation objective of 2% and ensure that inflation expectations are anchored at that level. 

He will likely decline to answer direct questions about communication between the Trump White House and the Fed on interest rate policy. But he will reiterate the importance of the Fed’s independence and nonpartisan mission if asked about the pressure exerted by the White House. 

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