With the assistance of RanSquawk
New Fed Chair Powell to deliver semi-annual testimony to Congress.
- Text of Testimony to be released on Tuesday 27th February 2018 at 1330GMT/0830EST
- Testimony before the House Financial Services Committee on Tuesday 27th February at 1500GMT/1000EST
- Testimony before the Senate Banking Committee on Thursday 1st March at 1500GMT/1000EST
Fed Chair Powell will deliver his first monetary policy testimony to Congress, beginning on Tuesday in front of the House Financial Services Committee and continuing on Thursday in front of the Senate Banking Committee.
As previewed yesterday by Deutsche Bank, Powell is widely expected to follow a similar path to Janet Yellen and reiterate that further gradual increases in the Fed Funds Rate (FFR) are warranted. With a March rate hike appearing to be a forgone conclusion, it would take a huge dovish u-turn from Powell for the Fed to delay hiking next month.
Markets will instead be looking at the comments for any clues on whether four 25bps rate hikes in 2018 are likely. Back in his testimony ahead of getting confirmed as Fed Chair, Powell said that risks to the economy appeared to be balanced.
“The median rate projection of the FOMC last December called for three 25bps rate hikes in 2018, and we expect Powell’s comments to be supportive of this outlook,” writes HSBC.
Nevertheless, Powell would most likely prefer to keep the option of a fourth hike in 2018 open without so much as confirming it.
“A clear majority of the FOMC, including its new Chairman, will want the optionality on the table of a potential, perhaps even probable, fourth rate hike this year,” writes SGH Macro Advisers. “But our sense is that Powell and most of his Committee colleagues will not want to signal the fourth rate move as a given in either the testimony or, we suspect, the March meeting.”
On inflation, the Fed had previously categorized inflation weakness as “transitory,” (in his November confirmation hearing, Powell himself alluded to uncertainty regarding the path of inflation). However, the recent CPI data and average hourly earnings data both point to an acceleration in price pressures. The focus is on how Powell frames the recent firming. UBS believes Powell will likely project increased confidence that inflation will rise to target this year.
FED POLICY FRAMEWORK
A number of policymakers, including Rosengren and Mester, have recently spoken about how they’d like a review of the Fed’s policy framework. HSBC speculate that the topic could come up in the Q&A and markets will be looking for whether Powell would be open to reviewing the policy framework and his thoughts on alternatives to the current 2% inflation target, whether that be price-level targeting or a target-range for inflation.
The recent market volatility has been attributed to inflationary pressures forcing traders to reprice their expectations of the Fed hiking cycle. After the FOMC’s experience of the ‘taper tantrum’ in 2013, it will be cautious about managing market expectations.
At his swearing-in ceremony Powell alluded to the recent market volatility, stating that the Fed will “remain alert” to any financial stability risks presented by market gyrations. “He will labor to avoid even a whiff of baby-sitting a wobbly stock market with a ‘Powell put’ readiness to intervene,” SGH writes. “But he will be equally forceful in affirming the Fed will not rush to raise rates against what it believes will be a rising but hardly accelerationist inflation.”
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As a bonus, here is Rafiki Capital Management’s Steven Englander explaining why he is looking for a Neutral to Dovish Powell testimony tomorrow
There is no particular reason for Fed Chair Powell to send a message on Tuesday and it is very possible that the Fed has not yet decided what message to send. That is the neutral part. Just keep saying ‘data dependent’ and that you will be watchful on inflation and no one goes away with any sense that policy has shifted.
Market expectations are steady at 70bps for the next year, but that is equivalent to Powell talking confidently about the three hikes implied by the dots. He can say ‘it can be more or less, depending on the data’ and that would be neutral as well. Take it for granted that he will sound confident that inflation gradually will head back to 2% and that they are watchful for any signs that disinflationary shocks resume.
Hawkish would be opening the door to four hikes based on the data at hand or their current baseline. If he opens the door to four by saying something like “If the economy continues along the current path we see three,or possibly a bit more, hikes as reasonable”. That brings the debate to three versus four, and the market is not priced for that. There is no reason for him to raise that issue, and recent Fed speakers have been pretty relaxed. If he strays from the ‘the FOMC feels’ or ‘the Committee feels’ to something more personal that would also be a signal, but there is no real reason to stray.
He could make a reasonable case that inflation is coming back faster than expected and that risks of overheating are higher because of the shift in fiscal policy, but he won’t. The market has 45bps total for March and June already priced, so there is no dovish mispricing to correct. If he ramps up the hawkometer, he runs the risk of tanking markets and altering growth expectations for no particular reason. If he saw serious upside risk to inflation, you could make the case for his biting that bullet now, but nothing in his past statements suggest he has very strong nonconsensus views, so he will probably go with the FOMC/staff views, which are not alarmist. He is probably satisfied with market pricing and sees no immediate need to disrupt it.
One potentially hawkish headfake would be an expression of indifference to recent market fluctuations, saying the equivalent of ‘corrections are healthy’, ‘markets go up or down, or ‘the Fed is not targeting equity prices’. This is much easier to say when the S&P is 2775 and rising, rather than 2600 and falling. So it sounds hawkish and tough but in reality does not mean much.
The dovish risk is that he too finds some language that conveys that the Fed is more worried about inflation undershoots than overshoots. He won’t emphasize the political motivation as I do in the note below, but there is a growing sense that no one on the FOMC wants to risk under-2% inflation and many want somewhat above 2% to mitigate zero bound problems and to anchor inflation expectations at or above 2%. Aiming for exactly 2% inflation, with symmetric risk on each side, is almost a quaint affectation at this point.
His predecessor would generally say that the Fed had a symmetric 2% target but occasionally spice it up with a comment that a period of above 2% inflation was not a big deal. When inflation was well below target, you could read that as a way of trying to manipulate inflation expectations upwards, and markets at least partially discounted such comments. Now that 2% looks as if it is a real possibility, a casual view about an overshoot will be taken more seriously. What he is not going to say is that there is a symmetric loss function, that 1.8% is as bad as 2.2%.
If you convey that are really looking for higher, you are telling investors you will be behind the curve in hiking, and will give the cycle a chance to extend. If you say ‘2% is 2%’, then you go to neutral when you hit the target and the business cycle is in late middle age.
As a last thought, consider the possibility that four hikes is not hawkish in absolute terms given the stimulus being applied, even if it is 30bps above current expectations. It would mean that asset markets are having a collosal misread of the upside activity and inflation risks. It may be consistent with inflation persisting closer to 2.5% than to 2% for an extended period. This is not a discussion Powell wants to have tomorrow, but it is one that may come down the road.