Federal Reserve Chairman Jerome Powell heads to Capitol
Hill Tuesday for his second pair of hearings since becoming the central bank’s
new leader in February.
He starts Tuesday before the Senate Banking Committee,
which releases his testimony when the hearing begins at 10 a.m. EDT. He
returns Wednesday to answer questions from the House Financial
Services Committee, also starting at 10 a.m.
His remarks are unlikely to surprise. Not much has changed
since he said at his press conference June 13 that “the U.S. economy is in
great shape.” Fed officials voted that day to raise interest rates and pencil
in two more increases this year. Still, he will be pressed for answers on
an array of issues. Here’s what to watch:
Fed officials are growing more nervous about rising trade tensions,
according to minutes
of their June meeting released last week. Watch for how Mr. Powell
responds to questions about the implications for the U.S. economy and Fed
He is likely to repeat that it is still too early to
know—with many threats still in the air and considerable uncertainty about what
proposals will go into effect. And he has resisted requests for comment on
specific policies that the Fed doesn’t set, including fiscal and trade policy,
because he believes it weakens the central bank’s case for political
independence in setting monetary policy.
Nevertheless, Mr. Powell could be pressed on how the Fed would
respond if new trade measures hurt U.S. economic growth, which might call for
lower rates, while also boosting inflation, potentially requiring higher rates.
He said in a radio interview last week such a situation “would be very
Mr. Powell could face hostile questioning from Senate
Democrats who opposed steps the Fed took to relax certain financial
regulations. In a letter last week, Sens. Sherrod Brown of Ohio and Elizabeth
Warren of Massachusetts pressed Mr. Powell for details
about the unusual treatment of Goldman
Sachs and Morgan Stanley in
recently conducted stress tests.
Mr. Powell has generally defended most of the postcrisis
financial regulations, and he could characterize recent changes as simplifying
rather than relaxing them.
Watch to see if he goes further and discusses how the Fed
might adjust either regulatory or monetary policy if officials see a rising
risk of financial instability.
Growth: A Virtuous Cycle?
employment report showed solid hiring and an uptick in the
unemployment rate, to 4%, from 3.8% in May, because of a surge of entrants into
the labor force. If this could be sustained, the economy would be in a sweet
spot for the Fed.
Watch to see whether Mr. Powell thinks more workers can be
drawn in off the sidelines. If he does, that would allow the Fed to continue
raising rates very gradually without worrying that low unemployment will send
inflation too high.
Mr. Powell has made clear his uncertainty about the
unobservable variables that are particularly important in setting monetary
policy. One example is the so-called
natural rate of unemployment, the level which neither spurs nor slows
inflation. Falling below that level could lead to unsustainable price
Mr. Powell’s caution about such unobservable variables
could signal a willingness to accept a slower pace of rate increases than
textbooks might dictate.
On the other hand, Fed economists are looking for signs
that the inverse relationship between unemployment and inflation, dormant in
recent decades, might quickly awaken once the jobless rate falls below a
In the 1960s, Fed officials adopted an “overly optimistic
view of the natural rate of unemployment,” according to a 2011 paper co-wrote
by John Williams, who is now the New York Fed’s president.
Watch for how Mr. Powell rates the prospect of a similar
mistake by officials today. A related concern is how much to worry that instead
of unsustainable price pressures, a period of strong growth and low
unemployment might fuel asset bubbles or other sources of financial
The Shrinking Bond Portfolio
Movements in short-term money in the spring prompted
officials to tweak the way they set interest rates in June. Fed officials think
upward pressure on their benchmark federal-funds rate stemmed from market
dynamics unrelated to their program to shrink the central bank’s $4.3 trillion
bond portfolio. This process is draining bank deposits at the central bank,
called reserves, which at some point probably will place upward pressure on the
Mr. Powell could face questions on how long the
portfolio-reduction process will continue. He probably won’t signal any changes
here because the Fed has set a high bar to alter course.
But the uncertainty over what is going on could prompt Fed
officials to open a debate over how to operate monetary policy in the
future—whether to continue with the current approach or revert to the one used
before the financial crisis.
Look to see if Mr. Powell offers any hints on this front.
Maintaining the current framework for setting rates would involve having lots
of reserves, which would require an early end to running down the portfolio.
Returning to the old approach would mean fewer reserves and allowing the portfolio
to wind down for longer.
here for the original article from The Wall Street Journal.