In case you missed it, New Fed Chair Jerome Powell testified before the U.S. House of Representatives Committee on Financial Services for over three hours yesterday, which pushed the Greenback higher on most pairs. Why? What did he have to say? Well, here are the key takeaways from his testimony that you need to know about.
1. Powell is upbeat on the U.S. economy
Powell generally had a positive assessment and outlook on the U.S. economy, highlighting the “solid [economic] growth and a strong labor market,” particularly the “modest acceleration” in wage growth.
On a more downbeat note, Powell noted “inflation has been low and stable” despite improvements in the labor market and the general strength of the U.S. economy.
However, Powell remained upbeat on inflation when he stressed that:
“We continue to view some of the shortfall in inflation last year as likely reflecting transitory influences that we do not expect will repeat.”
Moreover, Powell said that:
“[S]olid economic growth among our trading partners should lead to further gains in U.S. exports, and upbeat business sentiment and strong sales growth will likely continue to boost business investment. Moreover, fiscal policy is becoming more stimulative.”
2. Powell preached continuity
With regard to monetary policy, Powell first described the Fed’s recent actions, namely the rate hikes and decision to start unwinding the Fed’s balance sheet.
He then said that these “actions reflect the Committee’s view that gradually reducing monetary policy accommodation will sustain a strong labor market while fostering a return of inflation to 2 percent.”
In short, Powell is saying that he will continue his predecessor’s actions and the Fed’s approach of “gradually” tightening monetary policy.
3. Rate hikes are the way to go
In his prepared speech, Powell said that “further gradual increases in the federal funds rate will best promote attainment” of the Fed’s dual mandate of price stability and maximum employment.
That is already a hint that the Fed only wants to tighten monetary policy through rate hikes.
And when Powell was asked during the Q&A portion if the Fed has any plans go affect monetary policy by accelerating the unwinding of the Fed’s balance sheet holdings, Powell rebuffed the suggestion by saying: “I like our current plan.”
4. More hikes to come?
Rep. Carolyn Maloney asked Powell during the Q&A portion the following golden question:
“What would cause you to raise rates more than three times this year?”
Powell didn’t answer the question directly. Instead, he had these interestings things to say:
“At the December meeting the median participant called for three rate increases in 2018. Since then, what we’ve seen is incoming data that suggests a strengthening in the economy and continuing strength in the labor market. We’ve seen some data that in my case will add some confidence to my view that inflation is moving up to target. We’ve also seen continued strength around the globe. And we’ve seen fiscal policy become more stimulative. So I think each of us is going to be taking the developments since the December meeting into account and writing down our new rate paths as we go into the March meeting, and I wouldn’t want to prejudge that.”
If we read between the lines, Powell said that the Fed did project three rate hikes back in December. However, because of the positive developments that Powell listed, it’s implied that Powell and perhaps the other Fed members will update their projection for the Fed Funds rate to show more than three hikes this year.
Take note that Powell is speaking for himself, and not for the Fed as a whole. However, that didn’t stop market analysts (and traders) from concluding that the Fed will be upgrading its projections for the Fed Funds rate.