What to look for from Fed Chair Powells testimony

  • Fed Chairman Jerome Powell testifies before Congress on Tuesday and Wednesday.
  • Among the issues he’s likely to discuss are a dovish shift in policy, the Fed’s view on the coronavirus impact and the effort to push up inflation

Federal Reserve Chairman Jerome Powell heads to Capitol Hill on Tuesday at a touchy juncture: The world is awash in fear from a deadly virus outbreak, lawmakers are just getting over a historically bruising political battle, and the central bank continues to fight against the perceived evil of low inflation.

In his semiannual remarks to the House on Tuesday and the Senate a day after, Powell will look to provide a view on the economy and some clues on policy without tying himself or his colleagues to a specific policy path.

Wall Street expects a generally upbeat presentation sprinkled with a nod toward the coronavirus threat as well as some of the other issues with which policymakers have wrestled.

“Generally, he’ll want to stick to the script,” said Mark Zandi, chief economist at Moody’s Analytics. “He may highlight the potential threat from the coronavirus as an issue. He’ll probably continue to remain on the dovish side.”

Here’s what Wall Street will be looking for in the Powell testimony:

In 2019, the Fed made a substantial policy shift, going from a stance of steadily raising rates and reducing its bond holdings to easing through rate cuts and, ultimately, rebuilding its balance sheet.

January’s Federal Open Market Committee meeting saw a continued commitment in that direction, with the policymaking FOMC signaling no rate hikes ahead amid a continued push to raise the inflation rate.

Markets expect Powell to do nothing to dissuade the market from the notion that the Fed is on hold indefinitely. In fact, traders in fed funds futures are pricing an 84% chance of at least one cut this year and a coin flip on a second, even though the FOMC’s “dot plot” of individual members’ expectations indicates no moves either way.

“It fees like the Street and the dot plot are in two different places,” said Art Hogan, chief market strategist at National Holdings. “Is the Street out of bounds on this, or is this early in the year and the dot plot hasn’t had a chance to catch up yet?”

That question could revolve on how well the Fed does in meeting its goal to bring up inflation to what it considers a healthy level.

Markets expect that at some point this year, the Fed will announce it is changing its approach to inflation, from looking specifically for a 2% level to instead an average of 2% that will provide more flexibility should it overshoot.

Powell is unlikely to announce any specific moves, but he could provide more clues as to the Fed’s timeline and ultimate intentions.

“We think that he will indicate a dovish shift in tone within the Fed, particularly in light of the review they’re conducting at the moment on the possibility that they could adjust the framework, build up an average inflation target, something like that,” said Paul Ashworth, chief U.S. economist at Capital Economics. “I just wonder whether there will be any hints of the general need to allow after a period of prolonged undershoot an occasion for allowing an overshoot.”

Fed officials see 2% as a healthy level in a growing economy and one that allows enough room for interest rates to be able to cut in case of an economic downturn. At the January meeting, the committee tweaked its policy statement to emphasize its desire to get “to” 2% rather than near it.

Achieving that will require a growing economy as well.

Source: https://www.cnbc.com/2020/02/10/what-to-look-for-when-fed-chair-powell-meets-with-congress-this-week.html

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