Powell Pushes Back Against Tapering Talk In House Testimony

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by Tyler Durden
Wednesday, Jul 14, 2021 - 05:37 PM

Update (1350ET): Nearly two hours into Powell's testimony, AOC appeared on screen to prod Powell about the fallout should the Fed prove to be wrong about its inflation outlook.

If the Fed does tighten prematurely, it could disproportionately harm working-class majority-Hispanic and Black communities like her district in the Bronx and Queens.

After a sprawling question, she asked Powell if the Fed is serious about the economy's ability to bring employment levels back to 3.5% unemployment.

"I have every reason to think that we will get back to "high levels of participation".

She then pushed Powell to explain how the CARES Act and other pandemic-inspired stimulus measures have helped the US become one of the only countries to exit the pandemic with higher rates of growth, and having recovered the damage it sustained during the lockdown. Powell seemed all too happy to smile and nod his approval before the Committee moved on to a Republican with a slightly more technical question about how the regional Fed banks collect data over their areas of supervision.

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Update (1320ET): Powell was repeatedly pressed and prodded during his testimony today, and one lawmakers confronted him about the Fed's own inflation outlook (causing him to calmly, but forcefully, dispute a lawmaker's assertion). But overall, Powell mostly held his own, repeatedly disputing the notion that the Fed was under any kind of pressure to accelerate its tapering plans, or even consider rolling back its MBS purchases, which have become increasingly controversial, as evidenced by questions from several Democratic lawmakers, including Chairwoman Waters.

Powell will testify before Senate Banking tomorrow. Importantly, this is his last jaunt with Congress before President Biden is set to decide whether to appoint Powell for another term, a fact that was not lost on the Democrats - or Republicans.

Ranking Chairman Patrick McHenry congratulated Powell and said he absolutely deserved another term as chair of the Fed - though McHenry added that Congress would not hold back when it comes to chastizing Powell for his mistakes.

Asked about the Fed's development of a digital currency (the rumored Fedcoin that would rival China's e-RMB), Powell said he believes the central bank should solicit public comment on digital currencies. He also said that the world may not need private cryptocurrencies if the Fed launches a digital dollar.

Bottom line: Powell said it would be a "mistake" for the Fed to remove accommodation prematurely, since it has plenty of tools to react to inflation should it prove necessary. But as things stand, the US economy is still a ways away from reaching the point where the Fed deems it's mandates to be satisfied.

While the Fed lacks certainty, Powell insisted yet again that this is the Fed's view.

As for inflation, Powell acknowledged that it has "increased notably" in recent months, and that it would likely "remain elevated in the coming months before moderating."

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Fed Chairman Jerome Powell is set to begin his latest round of Congressional testimony before the House Financial Services Committee - a committee that's led by California Rep. Maxine Waters and stocked with left-wing "firebrands" like AOC - at 1200ET on Wednesday.

Readers can watch live below:

In his opening remarks - as we previewed earlier -  the Fed chairman pushed back against the notion that the Fed should consider accelerating the process of tapering its asset purchases and raising interest rates, processes which it last abandoned long before the pandemic hit. His remarks helped propel the S&P 500 to fresh record highs at the open (though stocks have drifted lower since).

Powell repeated his favorite analysis of the 'transitory' inflationary forces pushing on prices: "strong demand in sectors where production bottlenecks or other supply constraints have limited production has led to especially rapid price increases for some goods and services, which should partially reverse as the effects of the bottlenecks unwind."

As for rolling back the Fed's ultra-loose monetary policy? That won't be happening for a long time yet, no matter what Jim Bullard says (though Bullard will have slightly more influence when he becomes an FOMC voter again next year).

Said that "monetary policy will continue to deliver powerful support to the economy until the recovery is complete" which apparently won't be for a long time as the jobs market is still "a ways off" from the "substantial further progress" needed to begin tapering its bond buying.

  • Some more details from Powell's speech:

  • Household and business balance sheets are quite strong, core financial institutions are resilient

  • Strong job gains expected to continue in coming months as health crisis continues easing

  • Household spending rising at a rapid pace, housing demand is strong and business investment is solid

  • At our June meeting, the Committee discussed the economy's progress toward our goals since we adopted our asset purchase guidance last December. While reaching the standard of "substantial further progress" is still a ways off, participants expect that progress will continue. We will continue these discussions in coming meetings. As we have said, we will provide advance notice before announcing any decision to make changes to our purchases.

In addition to pushing stocks back into the green (thereby keeping his critics at bay), the market has pushed back its timeline for an update on the Fed's taper plans, with many seeing the Fed's Jackson Hole conclave as premature. 

Powell's full prepared remarks are below (pdf link)