El-Erian: Six Quick Takeaways From Powell’s Testimony
By Mohamed A. El-Erian
In a wide-ranging discussion with lawmakers on the House Financial Services Committee on Tuesday, Federal Reserve Chairman Jerome Powell painted a relatively optimistic picture of the U.S. economy even as he pointed to balanced risks to the “strong” outlook.
He dampened concerns about negative spillover effects to the economy from the recent spike in market volatility, reiterated prior policy guidance for a further “gradual increase” in policy interest rates, and signaled his commitment to cognitive diversity to enhance good decision-making. More specifically:
- Powell observed that accelerating U.S. expansion is occurring in the context of a “moment of global growth,” when headwinds have shifted to tailwinds. This is reinforcing the domestic pro-growth impact of favorable consumption and business investment, stronger sentiment and sales, and more stimulative fiscal policy.
- With the unemployment rate at a historically low level and the labor participation rate not moving up much, Powell expressed confidence that wage growth would pick up and that the recent shortfall in inflation would prove transitory. As such, the Fed is likely to continue its gradual interest rate increases, while allowing the balance sheet to shrink to more normal levels. In responding to questions about inflation targeting, he repeated the central bank’s openness to further analytical conversations on the monetary policy framework. He cautioned against using just history — that is, the traditional signal of a future economic slowdown — to interpret the implications of the recent flattening of the yield curve.
- The Fed chairman reiterated the need to revisit some aspects of the tighter financial regulation adopted in the aftermath of the global financial crisis, including leverage ratios. He pointed to the importance of continuing to evolve the regulatory approach to ensure the right balance between efficiency and soundness. He also stated his strong opposition to lending discrimination and “bad actors” in mortgage finance.
- Despite prodding by lawmakers, Powell refrained from commenting on policies that lay outside the direct purview of the Fed. These included questions on fiscal policy and the Deferred Action for Childhood Arrivals program. He stressed the multifaceted importance of education and the need to lower the unemployment rate for minorities and vulnerable segments of the population.
- Whether it came to the overall spike in volatility or questions about exchange-traded funds, Powell indicated it was unlikely the strengthening economy would be derailed by the recent bout of financial instability, though he emphasized the need to monitor developments closely.
- Finally, Powell reiterated the importance of having a variety viewpoints at decision-making tables to represent diversity of gender, race, education or experience.
Powell returns to Capitol Hill on Thursday to appear before senators and conclude this semiannual testimony on monetary policy. I suspect that, given some of the market reaction to his performance in the House on Tuesday, investors may look closely at whether he takes this opportunity to counter traders’ push to increase the markets’ implied probability of not just three rate hikes in 2018, which remains the baseline despite the uptick in yields during Tuesday’s testimony, but four.