As a part of his first semiannual monetary policy report to Congress, Chairman Powell made an appearance this week before both the House Financial Services Committee and Senate Banking Committee to discuss monetary policy and the state of the economy. How did he do?
First, his statement was short and sweet, hitting just the high points, with little of the minutia often presented by previous chairs. Markets and commentators interpreted his remarks on the economy as upbeat and perhaps a bit more positive than was suggested by the FOMC’s most recent statement in January. He stated that the economy grew at about a 3% rate in the second half of the year, supported by consumer spending and increased confidence. Labor markets improved, with the unemployment rate now standing at 4.1%, while inflation was slightly below target. He viewed policy as still being accommodative, and he supported the basic gradual approach to removing that accommodation put in place by Chair Yellen’s FOMC. Interestingly, given House Financial Services Committee Chairman Hensarling’s predilection for imposing a policy rule on the FOMC, Chairman Powell at least made a bow in that direction, concluding his statement by indicating that the FOMC routinely looked at such policy rules and that he, personally, felt they provided a useful reference.
Markets pulled back on his remarks, reflecting the conclusion of many that his remarks suggest that perhaps more than three policy moves might now be on the horizon. However, that kneejerk reaction overlooked several facts. First, the economy didn’t grow at 3% in the second half of the year, but rather by somewhat less. Moreover, Q4 growth at the now-downward-revised estimated rate of 2.5% was substantially less than the 3.2% experienced in Q3. Furthermore, data released in the last two months suggests that several key growth indicators have continued to moderate. To be sure, housing has remained strong, but pending home sales were off in January, due in part to lack of supply. On the other hand, durable goods orders were off 3.7% in January versus the expected decline of 2%. Interestingly, as new data continue to come out, the Atlanta Fed’s GDPNow forecast as of Feb. 27th stands at 2.6% for Q1 2018, down from 3.2% last week. Downward pressure reflects the decline in durable goods orders, reductions in estimates of nonresidential equipment, and inventory adjustments. The flow of recent data in February has resulted in a continued decline in the Q1 GDPNow estimate from a high of 5% in early February to its present 2.6%. All of this suggests that markets may be reading too much into Chairman Powell’s rosy picture for growth in early 2018 or the likelihood of four rather than three rate hikes this year.
What else might we have learned from Chairman Powell’s testimony? First, he was relaxed, confident, and clearly at home testifying. Perhaps more importantly – and this is a clear reflection of the fact that he has been a Board member for several years – he exhibited a broad knowledge of the various issues pertaining to regulatory policy, the treatment of derivatives in proposed supplemental leverage standards, and the implications of work being done in the US by the Fed and others to devise an alternative benchmark should LIBOR cease to be a useful reference rate, just to name a few examples. He did so without even having to stop to reflect or collect his thoughts. Particularly impressive was his response to a question about a very sophisticated research study that questioned the effectiveness of the Fed’s QE policies, a study that had only very recently been presented at a monetary policy seminar in New York City sponsored by the University of Chicago’s Booth School. In plain English, he noted that the study attempted to isolate the effects of policy surprises on interest rates, and he then went on to indicate how that approach might not provide a full story with regard to the effectiveness of QE.
Finally, he displayed extreme patience as several House committee members used their allotted time to grandstand and give speeches pushing their pet agendas, most of which were totally outside the scope of the subject of monetary policy or the Fed’s authority. The Senators focused mainly on regulatory issues, wage inequality, and the impacts the tax proposals and budget decisions had and will likely have on the pace of policy. Chairman Powell indicated that it is difficult to isolate what the likely impact of those changes will be on the economy and subsequently on policy. Powell was respectful but at the same time did not dismiss the members’ concerns, despite the fact that most of these issues are beyond the Fed’s control. All in all, this was an extremely effective first-time performance, and it appears that the Fed is in the hands of a competent and informed leader.