Fed Chair Jay Powell will testify before the Senate Banking Committee this morning, as part of his semiannual ‘Humphrey-Hawkins’ appearance before Congress.
Powell will have to convince legislators that he can fight inflation without risking dragging down the economy.
Democratic lawmakers will exclaim their concerns that the Fed might weaken the economy into recession – crushing the working-man (preferring to ignore the inflationary damage to average joe’s cost-of-living); while Republican politicians will question The Fed’s commitment to crushing inflation and whether Powell and his pals remain behind the curve (preferring to ignore the economic blowback of higher rates).
Still, we wonder if anyone will actually Powell whether he and his cronies feel responsible for unleashing this current state on the world?
We note that the market’s terminal rate expectations were at 5.47% before the hearing began.
Watch Powell’s tight-rope-walking testimony live here (due to start at 1000ET):
Read Powell’s prepared remarks here:
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As we detailed earlier, it’s not just a very busy week for markets and economic releases: it is also a busy week is on tap for policy events. Fed Chairman Powell will testify before Congress regarding monetary policy but is likely to face numerous questions on economic policy as well as financial regulation.
Also, as Stifel’s Chief Washington Policy strategist Brian Gardner notes, financial regulators will speak publicly this week on digital assets. Elsewhere, the White House will release President Biden’s FY2024 budget on Thursday. Investors should discount headlines following the budget’s release. Presidents’ budgets are typically DOA and this one is likely to be no different. Lastly, President Biden indicated that he will sign legislation to block changes to Washington DC’s criminal code. This provides a clue regarding future prospects for action on China tariffs.
Below we look at these in sequence:
Powell on Capitol Hill
Federal Reserve Chairman Jerome Powell will testify before Congress twice this week. First, Powell will appear before the Senate Banking Committee on Tuesday and before the House Financial Services Committee on Wednesday. While the stated purpose of his appearances is to deliver the Fed’s semi-annual monetary policy report, numerous questions will be asked about bank regulatory issues.
In her preview, Bloomberg chief economist Anna Wong says she expects Powell to signal the Fed is ready to push rates higher than December’s dot plot indicated if inflation prints continue to exceed expectations, underscoring the FOMC’s resolve to get inflation under control. At the same time, he’ll acknowledge that the Fed’s dual mandate includes full employment, and that he retains hopes of achieving a soft landing for the economy.
Here is what else Bloomberg expects:
Powell will provide his read on the latest, confusing trove of economic data. Recent labor-market data have been strong, but the signal has been clouded by weather-related volatility.
Powell will emphasize that the most important takeaway from recent data is that taming inflation requires a sustained effort. Whether the peak rate ultimately will be 5.25% or 5.5% won’t make a major difference for the economy. What matters more is that inflation is proving sticky and isn’t likely to disappear unless the Fed keeps monetary policy restrictive well into next year.
Bloomberg Economics’ Fed spectrometer rates Powell as one of the more hawkish individuals on the FOMC. It’s possible he may endorse the recent upward shift in market pricing of the terminal rate to 5.5% – higher than the 5.25% indicated in the December dot.
More likely is that Powell will say policymakers still haven’t determined the ultimate destination of rates – consistent with what other Fed officials have said in recent speeches. That decision will depend on incoming data – and February’s nonfarm payrolls report (March 10) and CPI data (March 14) will be critical.
Regarding speculation of a 50-basis-point hike at the March meeting, Powell is likely to say everything is on the table, but will hint that the bar to re-accelerate the rate-hike pace is high. BBG’s baseline is that the Fed will hike by 25 bps in March, followed by another 25 bps in May, and then pause.
Republican lawmakers may question whether the Fed is behind the curve again, citing the easing in financial conditions since October 2022. Powell will likely push back on the idea that financial conditions have loosened. He may argue that, as in the Monetary Policy Report he submitted ahead of the testimony, “financial conditions have tightened further since June and are significantly tighter than a year ago.”
The Monetary Policy Report cited various metrics showing tightened financial conditions: Bond yields have risen across maturities; issuance of leveraged loans and speculative-grade corporate bonds slowed substantially in 2H22; business loans at banks decelerated in the fourth quarter; indicators of future business defaults are elevated; delinquency rates of credit cards and auto loans rose.
That explains why Powell said in his press conference after the February FOMC that financial conditions had tightened — even as indexes of financial conditions that markets watch had loosened at the time.
Stifel’s Gardner adds several secondary things to keep an eye for:
in a recent speech, Federal Reserve Vice Chairman for Supervision Michael Barr cited academic studies which found that bank capital requirements are too low. Committee members could ask Powell about whether he agrees with this assessment.
In the past, Chairman Powell has said that he would look for political support from Congress and the administration about whether the Fed should create a Central Bank Digital Currency (CBDC). Committee members are likely to revisit the topic of a CBDC as well as the regulation of digital assets, particularly Stablecoins and bank liquidity requirements. U.S. banking regulators recently issued a “Joint Statement on Liquidity Risks to Banking Organizations Resulting from Crypto-Asset Market Vulnerabilities” and Powell is likely to be asked about the statement.
Committee members could also ask Powell about bank mergers. Questions will likely not mention specific transactions but there could be questions about a review of bank merger rules as well as why there has been an increase in the time to dispose of bank merger applications.
Federal Reserve Chair Jerome Powell provides his semi-annual testimony to the Senate Banking Committee on March 7, and addresses the House Financial Services Committee the following day.
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Besides Powell’s testimony, there will be several other political events to keep an eye on:
In addition to Chairman Powell’s appearance on Capitol Hill, which will probably include Q&A on cryptocurrencies, several other regulators will speak in public this week on digital assets.
- CFTC Chairman Rostin Behnam testifies at a CFTC oversight hearing in Senate Agriculture Committee.
- Fed Vice Chairman for Supervision Barr will give remarks on crypto activities to the Peterson Institute.
On Thursday, the White House will release President Biden’s FY2024 budget. As a reminder to investors, budgets are loaded with policy proposals, most of which will never see the light of day. This budget will likely be no different.
The President’s State of the Union address previewed several tax proposals that are likely to be included in the budget including taxes on unrealized capital gains and an increase in the stock buyback tax. The proposal to tax unrealized capital gains will be DOA. Although an increasing number of Republicans have criticized the use to stock buybacks, GOP critics of buybacks are still a minority within the party. There seems to be insufficient support among Republicans to raise the buyback tax, so chances of the House even voting on the Biden proposal appear to be remote.
Vote on DC Crime Bill and Read Through to China Tariffs
Last week, President Joe Biden announced that he would not veto congressional legislation to overturn the changes to Washington DC’s criminal code which would reduce penalties for some violent crimes. (The City Council has subsequently announced it will withdraw the planned revisions). President Biden’s decision reflects a political strategy to not allow Republicans to paint him as soft on crime ahead of the 2024 election. Although there are no direct market implications from the president’s decision, this move will likely be repeated regarding policies towards China, including the extension of the Trump administration’s tariffs on Chinese imports.
As we have previously written, the two political parties are engaged in a competition on which party can be seen as toughest on China. Just as Biden does not want to be painted as “soft on crime”, he also does not want to be painted as “soft on China”. The announcement on the DC crime bill reinforces the view that the administration will likely extend most, if not all, of the 2018 tariffs on Chinese imports.