Beckner: Powell’s Latest Testimony Reinforces Message of Monetary Gradualism

Written exclusively for InTouch Capital Markets

1st March 2018

By Steven K. Beckner

Financial markets had an unjustifiably sour reaction to Federal Reserve Chairman Jerome Powell’s first day of Congressional testimony Tuesday, interpreting his comments before the House Financial Services Committee as frightfully “hawkish.”

Powell’s second day of testimony before the Senate Banking Committee Thursday should calm fears the Fed is about to embark on more aggressive monetary tightening.

While he was certainly upbeat about the economic outlook as he repeated his prepared testimony on the Fed’s semi-annual Monetary Policy Report to Congress, Powell reemphasized the Fed will stay on a “gradual” path of federal funds rate hikes.

The meaning of “gradual” can change, of course, and it will obviously be important to see what kind of funds rate projections the Fed’s rate-setting Federal Open Market Committee announces March 21. But, as I wrote earlier this week, no one should jump to the conclusion that the FOMC is ready to significantly steepen the rate path just yet.

What alarmed Wall Street Tuesday was Powell’s comment, in response to a question about how many rate hikes he envisions this year, that his “personal outlook for the economy has strengthened since December,” when the FOMC’s median projection was for three rate hikes. That was widely taken to mean Powell was signaling four rate hikes.

But that overwrought interpretation ignored Powell’s qualifier that “inflation remains below our 2% longer-run objective.”

While staying upbeat about the outlook Thursday, Powell saw “no evidence the economy is overheating.” Although the 4.1% unemployment rate is “at or near or even below” full employment estimates, he told the Senators, “we don’t see any evidence of a decisive move up in wages” and nothing that “suggests … wage inflation is at a point of acceleration.”

True, the risks have become “more two-sided,” and the Fed doesn’t want to “get behind the curve,” the unflappable Fed chief said, but for now it can keep raising rates “gradually.” “That is the path we have been on and my expectation is that will continue to be the appropriate path.”

The FOMC could end up raising the funds rate four times, but that will depend on wage, price and other data. There is no such consensus now.