While mainly maintaining the FOMC’s stance, the new Fed Chair Jerome Powell’s Congressional testimony before the House Finance Services Committee was interpreted as a hawkish one. Heightened speculations for three, or more, rate hikes this year were reflected in higher yields, the rise of the US dollar to highest in 3 weeks and pullback in risk assets, including equities. In short, Powell’s assessment on US growth outlook was upbeat, describing growth and the employment market as strong. He also emphasized that fiscal policy, foreign growth, and financial conditions have turned from headwinds into tailwinds. Powell admitted that inflation remained low but affirmed that ‘some of the shortfall in inflation last year’, which were driven by ‘transitory influences’, should not repeat. On the monetary policy outlook, the new Chair reiterated the gradual path to normalization. Yet, he added the Fed would ‘continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2% on a sustained basis”. This appears to have signaled that the future rate hike path might steepen.
On economic developments, Powell noted that the US economy ‘remains strong’ as the Fed’s reversal of some of the monetary easing has not dampened growth. He suggested that ‘some of the headwinds the US economy had faced in previous years have turned into tailwinds’, with ‘fiscal policy’ becoming ‘more stimulative’ and ‘foreign demand’ on the country’s exports ‘on a firmer trajectory’. Indeed, Powell noted in the Q&A session that he personally sees the economic outlook has strengthened since December. On inflation, Powell admitted that it has been ‘low and stable’, staying ‘below the +2% rate that the FOMC judges to be most consistent over the longer run with our congressional mandate’. While continuing to attribute the soft price levels to ‘transitory influences’, Powell added that these ‘influences’ should not repeat this year.
What caught the most attention was his comment on the monetary policy outlook. According to Powell, the Fed would ‘continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2% “. This appears to have signaled that the future rate hike path might steepen. Note that the last economic projections released in December, and hence the median dot plot for rate hikes, did not account for the latest budget agreement. How the members view the impact of tax cuts and federal spending on growth and inflation would be seen in March. It would be of high interest to see if the members would raise their growth and inflation forecasts next month. More importantly, would the revised (higher?) forecasts lead to expectations of a steeper rate hike path (four rate hikes in 2018?).
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