Highlights from Chairman Powell's trip to Capitol Hill. Federal Reserve Chair Jerome Powell gave testimony to the Senate Banking Committee and House Financial Services Committee on March 7th and 8th. He baked the following message to markets into his opening statements: rates are going to be higher for longer, so stop the rally. To some extent, they listened. The SPY (biggest S&P 500 stock index fund) is down 1.4 percent from March 6th. The two year bond yield broke five percent.
SPY S&P 500 stock index ETF. Source: Tradingview
US 2 year Treasury yield, Mar 7-8th. Source: Tradingview
When Fed board members make public statements that can be interpreted to mean rates will be higher or increased faster, observers label those statements "Hawkish". Statements interpreted to mean slower hikes or rate cuts are "dovish". My "dovish" statement count was zero for both days. Here are the most important snippets:
"The full effects of tightening have yet to be felt"
"Without price stability the economy does not work for anyone"
"Given strong economic data for January, inflationary pressures are running higher than expected"
"Wage gains are above what is consistent with two percent inflation"
"Softening of labor market conditions is necessary"
"There are still 1.9 job openings per unemployed worker" [referring to Job Openings and Labor Turnover Survey - 'JOLTS']
"We anticipate that ongoing increases in the rate will be necessary"
"The process of getting inflation back down is going to take a while, rates will have to remain higher... We would be prepared to increase the pace of rate hikes" [Emphasis added]
Inflation is political, and despite the economics professors who insist otherwise, the Fed is political. Democrats in both houses seized the opportunity to admonish Republicans for holding up the process of raising the debt ceiling:
Ranking member Maxine Waters (D-CA): "We are just months away from a massive catastrophe - spiking interest rates, massive job losses, and other consequences - inflicted by Republicans threatening not to raise the debt ceiling... This is the biggest economic threat to consumers and businesses."
Many Republicans used their time to blame the Biden Administration's "reckless spending" for the inflation:
Chair Patrick McHenry (R-NC): "Biden's cow-towing to the Left is exactly what got us to this inflationary place... inflation picked up within a few months of Democrats passing the American Rescue Plan".
They've conveniently forgotten that they used a voice vote to pass the first two COVID stimmy packages in order to avoid having anyone's name tied to the legislation.
According to Senate Banking Chair Sherrod Brown (D-OH), the causes of inflation are, "Corporate greed, Russia's invasion of Ukraine, and supply chains damaged by the pandemic", therefore, "The old toolbox [rate hikes] won't work". He went on: "Workers are finally getting ahead and the Fed is threatening that with higher rates".
Elizabeth Warren never turns down an opportunity to pick a fight with the Fed Chair. She also pushes the view that inflation has soared because of "price gouging" and the war in Ukraine.
Quoting the Board's March 2023 Monetary Policy Report, she asked, "Do you know how many workers will lose their jobs for the unemployment rate to reach your 2023 projection of four point six percent?"
As expected, Powell said, "I don't have that number in front of me".
This gave her the perfect set up for the soundbite: "Chair Powell, if you could speak to the two million hard working people, who have decent jobs, who you're planning to get fired over the next year, what would you say to them about why they need to lose their jobs?"
Powell: "I would explain that inflation is extremely high and it is hurting the working people of this country badly, and it's hurting everyone, not just two million..."
Warren: "And putting two million people out of work is just... part of the cost?"
Powell: "Will working people be better off if we just walk away from our jobs and inflation remains five, six percent?"
He later added that a 4.6 percent unemployment rate is actually better than most of the last 50 years.
Lastly, there was one exchange that should make anyone with a functioning prefrontal cortex question the tradition of having a board of political appointees manage the nation's money supply.
Rep Bill Foster (D-IL): "What's your opinion on if you are paying too much attention to lagging rather than leading indicators?". For example, "If you had paid closer attention to rents on new leases, rather than all rents, you may not have gotten so far behind in fighting inflation... now that indicator says we're further along in fighting inflation than you might think. What lessons have you learned? What have you looked at to improve the bandwidth of your feedback regulator?"
Powell: "It's really hard to know what the lessons are... no one saw the supply chains collapsing, the fourteen percent unemployment, the collapse in labor force participation..."
In other words, the representative assumes too much, and the Fed Board has no "feedback regulator". I can understand not foreseeing changes in the labor force participation rate, but how hard was it to expect a collapsed supply chain and a 14 percent unemployment, given the policy responses enacted to "fight" COVID?
The Fed employs 900 PhD economists, and not one of them could tell the board that a policy of shutting down manufacturing operations all around the world would lead to a fragmented supply chain? How hard is it to anticipate that ordering millions of people not to work, then paying them not to work, would result in high unemployment?
This is the chairman of the committee which gets to decide the price of dollars. This institution's decisions ripple throughout the globe, as the dollar facilitates 88 percent of global trade and comprises 60 percent of global foreign currency reserves. It should not sit well with anyone that they enacted all-time-record breaking stimulus, during unprecedented supply scarcity as mandated by law, and then were caught off guard when this combination led to record breaking price inflation.
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