A few thoughts on what we think will be the likely takeaways from Federal Reserve Chairman Jerome Powell’s twin testimonies on Capitol Hill this week, beginning with his appearance before the House Financial Services Committee on Wednesday morning:
** We believe Chairman Powell will be careful to avoid an explicit signaling on whether the Federal Open Market Committee will cut rates at its July 30-31 meeting. But while he is likely to tack closely to the messaging since the June meeting for a data-driven possibility for a rate cut, he will be equally aware that a likely reference to the Fed’s “risk management considerations” — when all the risks are weighed to the downside — will in effect be taken as an affirmation on the likelihood of an “insurance” rate cut later this month.
** In other words, while we do not think there is a clear FOMC consensus yet on its likely rates decision later this month, Chairman Powell would have to explicitly push back against the market expectations if the FOMC is truly uncomfortable with the near certainty rate cut pricing. On balance, we think it more unlikely than not.
** That said, we do not expect Chairman Powell to give any indication of whether the FOMC is leaning to a true easing cycle or whether a potential July cut would be a one or two and done “insurance” rate reset; the FOMC seems to be far more likely to want a longer run of data before making that calculation, which points to September for that decision.
** We would caution, however, that Chairman Powell could also address the risk of potential financial market excesses — even as he offers reassurances about the resilience of the banking system — or how lower rates are not necessarily an optimal policy response when trade policy uncertainties, not the cost of capital, are slowing growth. Either could be taken as a nuanced if gentle push back on market pricing, though it has to be said Capitol Hill is not the place for nuance.
** It was also interesting to us that the Monetary Policy Report pre-released on Friday returned to describing the recent low inflation prints as “idiosyncratic” and “transient,” with no reference to whether the persistence in low inflation could be more structural rather than cyclical. That left us wondering whether it too was meant as a pushback against the market’s more aggressively dovish pricing?
** It seemed equally noteworthy how often the Fed cited the trade tariffs and policy uncertainties in the MPR as the primary reason for slowing growth. The political takeaway of that is obvious, and it will be particularly interesting to see how hard Powell will push that theme to blunt the White House political broadsides.
** Indeed, Chairman Powell is likely to get repeated questions from Democrats and perhaps even some moderate Republicans about the impact of the Trump Administration’s trade policies. But as much as he may be tempted to respond directly to that and the questions he will undoubtedly get over the President’s anti-Fed tweeting tirades, he is likely to stick strictly to noting the data on sharply curtailed business and agriculture confidence and capex, and stressing the Fed’s focus on its twin mandates in guiding rates policy while strongly asserting the Fed’s policy independence.
** And finally, Powell is also likely to do his best to stay neutral on the inevitable questions on the current budget negotiations. We suspect, however, he will note the obvious risks to growth, if not recession, if Congress returns to the sequestered levels of federal spending and, if truth be told, Powell may note the Fed could use a helping hand from fiscal policy in its efforts to “act as needed” to “sustain the economic expansion.”