Powell’s First Testimony

Jerome Powell made his first major appearance as the new Chairman of the Federal Reserve  in testimony before the House Financial Services Committee. Powell presented an upbeat take on the economy and noted that his outlook has improved incrementally since the FOMC’s December meeting, a comment that sparked a sell-off in the Treasury market and appeared to raise the odds of an upward move in the Fed’s dot plot at the March meeting.

Powell’s comments on the economic outlook were generally optimistic. He expects the next couple of years to look quite strong with continued improvement in the labor market, inflation moving up to 2%, and faster wage growth. He also noted that his outlook has improved incrementally since the FOMC last submitted economic projections in December. Relative to expectations at the time, he noted, the larger-than-anticipated tax cuts and federal spending increases would boost demand further. That more stimulative fiscal policy, strong incoming economic data, strength in the labor market, encouraging inflation news, and continued strong global growth have caused his outlook for the economy to strengthen.

The Treasury market sold off in response to those comments. Most investors appeared not to have anticipated that Powell would both acknowledge the incrementally better news and link it to the FOMC’s projections for its policy rate so soon and so straightforwardly.

We agree with the market’s hawkish assessment of Powell’s comments.  The end-2018 median dot is a very close call and at this point we see roughly even odds that it will show 3 hikes (2.125%) or four hikes (2.375%). December dots suggests that a shift from a three-hike to a four-hike baseline would require four participants to move up and for new Richmond Fed President Thomas Barkin to project at least four hikes in 2018 in his first submission. A recent comment from President Kaplan, shown in the table in the appendix, suggests that he is still at three hikes, meaning that four other participants would have to move up. We take Powell’s comments today to indicate that he is likely to move, and the decisions are likely correlated.The end-2019 median dot is more likely to move up to 2.875%, from 2.7% in December. The end-2020 median dot appears likely to come in at 3.125%.

In addition to his comments on the economy and monetary policy, Powell also offered views on several financial regulatory issues in response to questions from members of Congress. Powell emphasized that the Fed aims to strengthen the “primary pillars” of post-crisis financial regulation: risk-based capital requirements, liquidity requirements, the stress tests, and resolution planning. But he also expressed support for regulatory reform in several areas including Supplementary leverage ratio (SLR) ,Volcker rule., which Powell expressed agreement with the argument that it might be worth giving greater discretion to bank trading desks so that they could intervene in illiquid and volatile markets. He also said that the Fed would be ready to take on the role of lead regulator in multiagency discussions as it takes a “fresh look” at the Volcker rule, Stress testing and Regulatory relief for small banks.While Powell had expressed support for financial regulatory reform in the past, his comments today seemed to express a slightly firmer intention to make changes to the enhanced SLR and the Volcker rule.