Here's What We Learned From Powell's First Fed Chair TestimonyBy
Powell talks fiscal policy, deficits, wages and balance sheet
Repeated personal views raise questions about change in style
Federal Reserve Chairman Jerome Powell appeared Tuesday before the House Financial Services Committee, his first testimony since he took charge earlier this month. He moved markets with his upbeat economic assessment, and also dropped some hints about how his views and style might differ from his predecessor, Janet Yellen.
Here are a some observations beneath the main headlines:
A Personal Touch
When a Fed chief testifies before Congress, he or she is generally understood to be speaking for the rate-setting Federal Open Market Committee. Powell, however, on several occasions voiced strong personal views. That perhaps injects a new dynamic into the Fed’s communication that’s different from the Yellen era: a Fed leader whose own inclinations are much better known publicly.
Personalizing was apparent in several of Powell’s responses during the three-hour hearing. Since the Fed last released economic projections, Congress has rolled out two changes that could boost near-term growth. A $1.5 trillion tax package is adding stimulus to the U.S. economy, and a recent budget deal will lift spending caps and increase government outlays.
“I think our view -- my personal view -- would be that there will be a meaningful increment to demand, at least for the next couple of years, from the combination of those two things,” he said.
Powell’s voice also came through in his answer to a question about whether the new stimulus will spur more 2018 rate hikes than the three the Fed signaled in the central bank’s Summary of Economic Projections in December.
“My personal outlook for the economy has strengthened since December,” he said. “I wouldn’t want to prejudge that new set of projections, but we’ll be taking into account everything that has happened since December.”
Why does it matter that Powell isn’t shy about expressing his own views? The chairman is seen as the center of the committee, so his optimism may stoke expectations that the whole group will fall in line and pursue a slightly more aggressive tightening path.
Powell’s debut riled markets, sending stocks lower while pushing Treasury yields higher as investors bet that rates would rise more quickly. Fortunately, the new Fed chairman told lawmakers that market moves aren’t at the center of his dashboard, so he’s unlikely to be fazed by any near-term gyrations. The stock market is an important place for businesses to raise capital and it enters the Fed’s thinking, but it’s not the economy, he said.
While Powell nodded to the growth-enhancing benefits of fiscal policy reform, he was less welcoming of longer-term strain on the nation’s budget. The nation’s debt is unsustainable, he said, but he’s not sounding the alarm yet.
“There would come a time at which -- it’s not this time, not this time by a long shot -- but there could come a time when the public, the global debt-buying public, would come to the view that we either weren’t prepared to honor our debts or that we couldn’t service them,” Powell said. “We’re a long way from that.”
Powell widened our understanding of how he thinks about wages: While he sees them moving higher, “for wages to go up sustainably, you need higher productivity,” he said.
That’s important because if Powell thought that wage weakness was the result of lingering job market slack, the Fed would be able to counteract it. Given his stance, it’s an issue for Congress and President Donald Trump to tackle, and not one Fed policy can readily address.
The Fed’s balance sheet made an appearance in Powell’s congressional show. Policy makers are unwinding their holdings, swollen after three rounds of crisis-era asset purchases, and Powell got peppered with questions about that process. He reiterated the Fed’s line that officials ultimately want the balance sheet to be no larger than necessary to conduct effective monetary policy and that it will consist mainly of Treasuries at the end of the day.
“Our balance sheet normalization plan was carefully crafted and carefully rolled out," Powell said. “I would have little inclination to change the general parameters of it.”
Three’s Not a Crowd
The Fed Board is pretty short staffed right now -- just three of seven governor seats are filled. Powell isn’t asking for four new colleagues immediately, he told Congress, but it sure would be nice if he, Lael Brainard and Randal Quarles weren’t holding down the Eccles Building by themselves.
“We could really use some more faces on the hall,” Powell said. “We’re all three eager to have more people on board.”
There is one Fed governor nominee, Carnegie Mellon economist Marvin Goodfriend, who’s awaiting Senate confirmation. Given our latest report, approval isn’t a slam dunk.
— With assistance by Matthew Boesler, and Rich Miller