Fed: Powell to remain in the limelight - BBH

The new Federal Reserve Chairman appears before both houses of Congress in the coming days and many are hoping to glean more insight into Powell's leanings, but little new is likely to be garnered, according to analysts at BBH.  

Key Quotes

“Powell's confirmation hearings and the report issued at the end of last week underscores investors' belief that although President Trump chose to change chairs, he ultimately achieved as much stability and continuity as can be reasonably imagined.”

“At the risk of over-simplifying the Fed's economic assessment can be summarized in five observations:  1) the labor market remains solid, and wage growth is likely to increase, 2) household wealth is rising, 3) confidence measures are robust, 4) the global backdrop is strong, and 5) financial conditions are accommodative.”

“Is it true, as one journalist put it for many, that the Fed is under pressure to act more quickly to guard against the possibility that the economy overheats?  That assessment seems wide of the mark.  The Federal Reserve indicated in December, and more recent comments have not contradicted it, that three hikes this year are likely to be appropriate.  The market is the one behind the curve.  It does not have three hikes discounted.”

“Some investment houses forecast four hikes this year, but that is not what is discounted in the OIS or futures market.  Perhaps owing to the slow start of the rate hikes (one in 2015 and one in 2016), some criticized the Yellen Fed for over-promising and under-delivering.   Tactically, a case can be made for Powell under-promise and over-deliver by not formally calling for a fourth hike.”

“Powell will be able to raise rates at his first meeting, which helps create this persona as Chair.   It would be a knock against him if at the meeting he facilitated an increase to four hikes, but then due to changing circumstances could only hike three times.  The equity market swoon that marked his first days as Chair we suggest is purely coincidental.”

“Powell may be pushed on his views of that drop in the stock market, and investors will be interested in knowing if there is a Powell Put.  We think it has gotten a bad name, but central banks ought to take into account major disruptions in the capital markets when setting policy because of the risks to the underlying economy.  That said, the context matters, and we suspect that Powell will not strike a different chord than several other Fed officials who played down the significance of the recent decline.”