Powell Testimony

February 27, 2018

By law, the Federal Reserve Chair is required to testify before congressional committees (House Financial Services and Senate Banking) twice a year on the economy, monetary policy and anything else legislators might wish to ask. The so-called Humphrey-Hawkins testimony, named after the sponsors of the bill that made this requirement, is done in February and July.

A takeaway from Jerome Powell’s first Humphrey-Hawkins appearance today is that all things being considered, the case for continuing gradual interest rate hikes and ongoing balance sheet reduction has strengthened since the last full policy review with fresh forecasts that was done in December. The next review will be done about three weeks from now. Growth appears stronger. Inflation is a bit higher, with some evidence of better wage growth. The tax cut, all other things being the same, could also warrant some countervailing action in monetary policy. So might the softer dollar. There was not warning in the testimony that more volatile financial markets is a reason to slow down the pace of normalization.

The dot-plot diagram from December showing individual committee member preference for the future path of the fed funds target pointed to three increases during 2018. Powell declined to speak for his colleagues but suggested that he personally could be inclined now to consider four rate hikes. Bear in mind, these are forecasts, not pre-decided future policy changes. As always, the evolution of economic data and other pertinent developments dictate what is done each meeting, so without knowing precisely what that information will be, it’s not possible to say definitively that 3 or 4 or 5 hikes will occur in 2018. But the prime takeaway, is that four moves are look more plausible now than such did at the mid-December review.

On this first H-H testimony by the new Fed Chairman, the 10-year Treasury yield rose by a rather sharp five basis points to 2.92%, just a tad shy of its recent high.The dollar gained some moderate ground against the euro and yen, and the DOW and S&P early in the afternoon had traded down 0.5% each.

It’s interesting to compare this immediate response to how markets performed on the day of the first H-H testimony of Powell’s two predecessors. In Yellen’s case (February 2014), the dollar barely moved, the 10-year Treasury yield rose 3 basis points to 2.72% (not radically different from the level now), and both the DOW and S&P rose a bit more than 1.0%. In Bernanke’s H-H baptism of fire in February 2006, the dollar was also virtually unchanged on the day. The 10-year Treasury yield edged up a basis point to 4.61%, and the DOW advanced by 0.6%.

In none of these occasions did the dollar react substantially. By law, the Treasury Department and not the Fed is vested with the responsibility of setting U.S. foreign exchange policy. In each instance, long-term interest rates went up. That too makes sense. The Fed is the guardian of U.S. price stability. It’s always seen as important for a Fed Chair to be seen taking that mandate seriously, lest the credibility of the Fed’s commitment to protecting the value of money be eroded.

The most notable difference in how the market reacted today from the Yellen and Bernanke precedents was the drop in U.S. equity prices. To be sure, the stock market soared yesterday, and some profit-taking would have made sense in any case. But before Yellen and even before Bernanke, former Fed Chairman Greenspan developed a reputation for doing what it took to avoid a bear market in stocks. He’d been in the job just a couple of months when the crash of October 19, 1987 occurred. It came after Fed policy had been tightened, and the Fed quickly reversed course. But the time Greenspan stepped down in 2006, the term “Greenspan put” was firmly planted in the lexicon of Fed watchers.

On balance, stocks rose impressively on the watches of Greenspan, Bernanke and Yellen. Perhaps today’s drop in share prices will prove to be a harbinger of a different outcome over the long haul as well as on the first day.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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