Powell Successfully Walks the Tightrope

by Austin Mann, Knowledge Leaders Capital

Below we highlight a few takeaways from Fed Chair Jerome Powell’s confirmation hearing today before the Senate Banking Committee, broken down by topic.

-Focus on “less accommodative” moves

• -Powell made numerous statements indicating that COVID, though prevalent, will not be as pressing in policy decisions for the Fed going forward.
• -Instead, focus seemed to shift toward managing inflation regardless of COVID.
• -Powell wants to battle future outbreaks economically rather than becoming wrapped up in current issues.

-In a downturn/recession

• -Obviously the first move would be to lower interest rates, but Powell stressed how the Fed has very little wiggle room right now in this area.
• -Powell did not present inherent resistance to the concept of asset purchases.

-Wage increases

• -Powell is skeptical of wage increases.
• -While wage increases are generally a good thing, his opinion is increases also could cause persistent inflation.
• -Powell’s demeanor and language on this topic appeared to demonstrate a willingness to raise rates regardless of the effect on wages.

-Participation Rate

• -When asked about increasing the labor participation rate, Powell noted that in his opinion, current levels of inflation are creating an environment where employees are unwilling to return to work.
• -Powell felt that a strengthening dollar would give people the confidence to accept employment.

-Continuous references to the Fed’s limited role in climate change related policy

• -Members of the committee continuously brought up climate change policy, which did not seem to be of interest to Powell.
• -Likely, this is mostly posturing for constituents, but it may be significant to note that this is not necessarily a top priority in Powell’s mind.

-Overall Perspective

• -Powell (as expected) did not take any major stance on whether or not there would be more interest rate increases than initially projected by the Fed.
• -He left himself, skillfully, lots of wiggle room, but his responses to other questions gave the impression that he may not be shy about raising interest rates.
• -Powell seemed to see tackling inflation as the primary goal, stating that of the dual mandate, inflation was more off-target than labor conditions, and therefore must be handled first and foremost. When questions of employment, wages, climate, or lending were brought to the floor, he referred back to the inflation figures.

Overall, the market seemed comfortable with Powell’s words, with stocks reversing a multi-day downtrend. Yesterday December 2022 Fed Funds Futures closed with a yield to maturity of 90bps. If we start with the upper bound of the fed funds rate (25bps), then the market is pricing two hikes, with a 60% chance for a third in 2022. Prior to the hearing, fed fund futures rose to a high of 94bps, but by the end of the hearing, they were back down to 90bps, unchanged from yesterday. All in all, Powell seemed to successfully walk the tightrope today.

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