Fed Chair Powell Delivers Semiannual Congressional Testimony

Hawkish or dovish? That’s the question that many market watchers and investors have been wondering about newly appointed Fed Chair Jerome Powell and his approach to the Federal Reserve’s monetary policies as the head of the Federal Open Market Committee (FOMC).

Yesterday, Powell delivered his semiannual monetary policy report before the House, which was interpreted by some analysts as a bit more hawkish than former Fed Chair Janet Yellen. Tomorrow, he’ll do the same before the Senate, where he is likely  to follow in the steps of previous Fed chairs by delivering more or less the same message as the first day.

Here were the key points about the U.S. economy that Powell highlighted during the first day of testimony:

1. “The U.S. economy grew at a solid pace over the second half of 2017 and into this year. Monthly job gains averaged 179,000 from July through December, and payrolls rose an additional 200,000 in January. This pace of job growth was sufficient to push the unemployment rate down to 4.1%, about 0.75% lower than a year earlier and the lowest level since December 2000.”
2. “Inflation-adjusted gross domestic product (GDP) rose at an annual rate of about 3% in the second half of 2017, 1% faster than its pace in the first half of the year. Economic growth in the second half was led by solid gains in consumer spending, supported by rising household incomes and wealth, and upbeat sentiment. In addition, growth in business investment stepped up sharply last year, which should support higher productivity growth in time.”
3. “Inflation has continued to run below the 2% rate that the FOMC judges to be most consistent over the longer run with our congressional mandate. Overall consumer prices, as measured by the price index for personal consumption expenditures (PCE), increased 1.7% in the 12 months ending in December, about the same as in 2016. The core PCE price index, which excludes the prices of energy and food items and is a better indicator of future inflation, rose 1.5% over the same period. We continue to view some of the shortfall in inflation last year as likely reflecting transitory influences that we do not expect will repeat.”
4. “The economic outlook remains strong. The robust job market should continue to support growth in household incomes and consumer spending, solid economic growth among our trading partners should lead to further gains in U.S. exports, and upbeat business sentiment and strong sales growth will likely continue to boost business investment. Moreover, fiscal policy is becoming more stimulative. In this environment, we anticipate that inflation on a 12-month basis will move up this year and stabilize around the FOMC's 2% objective over the medium term.” 

TD ECONOMICS ON Q4 GDP.  For the most up-to-date TD Bank Group analysis of major economic reports, head to TD Economics. See below for disclaimer regarding this report.

The Fed’s mandate from Congress is to promote maximum employment and stable prices, and it uses monetary policy to accomplish this. These were the key points Powell highlighted regarding the FOMC’s approach to monetary policy:

1. “Over the second half of 2017, the FOMC continued to gradually reduce monetary policy accommodation. Specifically, we raised the target range for the federal funds rate by 0.25% at our December meeting, bringing the target to a range of 1.25% to 1.5%. In addition, in October we initiated a balance sheet normalization program to gradually reduce the Federal Reserve's securities holdings.”
2. “In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2% on a sustained basis.”
3. “In the FOMC's view, further gradual increases in the federal funds rate will best promote attainment of both of our objectives. As always, the path of monetary policy will depend on the economic outlook as informed by incoming data.”

Takeaways for Investors

During Tuesday’s testimony, Powell said “we don’t manage the stock market”, but he did note that “it enters our thinking.” Regardless, the Fed’s decisions and economic commentary ripple throughout global economies, impacting stocks, bonds, currencies and other assets.

That is why there is typically heightened volatility across many asset classes during the Fed Chair’s semiannual monetary policy report to Congress as well as the FOMC’s eight regularly scheduled meetings throughout the year (the FOMC also holds additional meetings if necessary.)

TESTIMONY MOVING MARKETS. The chart on the left shows the S&P 500 (SPX) during Powell’s testimony, compared to the Cboe Volatility Index (VIX), charted as the purple line. The chart on the right shows the 10-year Treasury Yield (TNX), which climbed to 2.908% by the end of the trading day. The SPX dropped during Powell’s testimony, while the VIX and the 10-year Treasury yield spiked. Chart source: thinkorswim^® by TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Following the Fed’s meetings can give investors an idea of what’s going on throughout the U.S. economy and might provide an explanation for any heightened volatility they might see in their portfolios. The next FOMC meeting, Powell’s first as Fed Chair, will be March 20-21. This is one of the four meetings in 2018 that includes a release of the Fed’s summary of economic projections and a press conference by the Chair.

Get a rundown on market activity and a recap of Fed meetings by reading TD Ameritrade Chief Market Strategist JJ Kinahan’s daily Market Update.