Update 675 — Powell: More Hikes to Come
Fed Course Reinforced by Strong Jobs Report
The ongoing narrative of a strong and resilient U.S. economy was reaffirmed once again by this morning’s jobs report. During February, the U.S. added 311,000 jobs though unemployment rose from 3.4 to 3.6 percent. Indeed, job gains far exceeded economists’ expectations, a key factor in the central bank’s decision regarding the size of the next rate hike. Even more important will be next week’s CPI inflation data.
The report comes just after Federal Reserve Chair Jerome Powell took the stand to deliver his semi-annual report to the two chambers of Congress. Throughout his testimony, Powell addressed the possibility of aggressive rate hikes in the near future but insisted the conversation was still ongoing and that no decisions had been made ahead of the FOMC’s March 22 meeting. Powell was reluctant to comment on but was repeatedly asked about broader issues engulfing Congress, such as the fight to raise the debt limit or possible changes to capital requirements.
Below, we boil down Powell’s testimony this week on Fed monetary policy and ancillary issues.
Good weekends all…
This week, Chair of the Federal Reserve Board Jerome Powell delivered his semi-annual testimony before Congress, following last week’s release of the Fed’s Semi-Annual Monetary Policy Report. Powell testified before the Senate Banking Committee on Tuesday and before the House Financial Services Committee on Wednesday.
Powell found himself in the hot seat defending the Fed’s dramatic interest rate hikes over the last year. He also carefully walked a tightrope in responding to members’ pointed questions on regulatory issues and the ongoing fight to raise the debt limit.
Fresh Uncertainty: a 25 to 50 BP Hike In March?
On March 22, the FOMC will hold its next meeting. Powell’s comments this week suggest a ninth consecutive rate hike. Powell stressed in his Senate Banking testimony that “the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.” He anticipated that “ongoing increases in the target range for the federal funds rate will be appropriate.” He stated that the central bank would assess the “totality” of incoming economic data in determining its decision, including Wednesday’s JOLTS data, this morning’s jobs report, and next week’s CPI inflation report.
- Jobs Report – Today, the Labor Department released its latest jobs report, which showed another larger-than-expected addition of jobs to the American economy in February of about 311,000 jobs (as measured by the Payroll Survey, the Household survey showed a 177,000 job gain), with gains concentrated primarily in the areas of leisure and hospitality, retail trade, government, and health care. The unemployment rate ticked up to 3.6 percent. The labor force participation rate was little changed at 62.5 percent showing a slow return to the workforce.The latest data on wage growth shows a 4.7 percent increase over the past 12 months but just 3 percent annualized over the last two to three months. The most recent data on wages may help ease the Fed’s concerns about stronger-than-preferred job growth.
- JOLTS Report – As Powell testified before the Senate Banking Committee on Wednesday morning, the Bureau of Labor Statistics released the findings of its latest Job Openings and Labor Turnover (JOLTS) Survey. The data showed that job openings fell from 11.23 million in December to 10.8 million in January, representing 1.9 job openings per available worker. Additionally, hiring increased from 6.25 to 6.37 million, layoff rose from 1.5 to 1.7 million and the quits rate fell from 4.09 million to 3.9 million, overall revealing a cooling labor market.
- CPI Inflation Report – On Tuesday, the Bureau of Labor Statistics will release the Consumer Price Index report, tracking the price level of a broad basket of goods and services. The overall CPI rose by 0.5 percent in January, while the core CPI, which excludes food and energy prices rose by 0.4 percent.
Powell Defends Policy Cost in Unemployment
Following January’s meeting of the Federal Open Market Committee (FOMC), the Fed raised the Target Federal Funds Rate for the eighth consecutive time, continuing its most dramatic series of rate hikes since the early 1980s. The 25 basis point hike took the range to 4.5 to 4.75 percent, representing the Fed’s smallest of recent rate hikes.
In his opening statements, Powell reviewed the Fed’s forceful efforts over the past year to reduce inflation. He also sought to preempt legislators’ concerns about the impact of further rate hikes on working families by enforcing his belief that the Fed’s dual mandates of achieving low and stable inflation and maximizing employment did not conflict. Rather, he emphasized his stance that low inflation was necessary for a strong resilient job market to sustainably thrive.
Senator Warren forcefully stated that if the Fed continues its plan to raise interest rates, unemployment will increase to 4.6 percent by the end of the year. She pointed out that this would result in “two million people who would lose their jobs.” She further stressed that the Fed had a weak historical record of containing modest increases in the unemployment rate. Powell faced similar challenges from Senator John Kennedy (R-LA). During Powell’s testimony before the HFSC, Rep. Joyce Beatty (D-OH) stated that a comparison of unemployment ratios from the last time the unemployment rate was at 4.6 percent with current numbers shows that African American workers will bear the brunt of job losses.
Powell said that January employment, consumer spending, manufacturing production, and inflation data showed a partial reversal of the softening trend observed as recently as December. Despite falling energy prices, an easing in supply chain bottlenecks, and an expected deceleration in housing services inflation, the higher-than-target inflation level remains more persistent than the FOMC expected in its last meeting.
Other than Inflation, Mr. Powell…
Committee members in both chambers and on both sides of the aisle took the opportunity to raise far more than monetary policy questions and highlighted a series of financial and regulatory issues. These included:
- Debt Limit – Powell affirmed the threat of long-term damage to the U.S. economy if Congress fails to raise the debt limit and stressed that raising the debt limit was the only way forward. He testified that the Fed’s tools cannot protect the economy in such a scenario.
- Capital Standards – Last year, Federal Reserve Vice Chair of Supervision Michael Barr announced plans to conduct a “holistic review” of capital standards, saying such a review should be a periodic feature of bank oversight. Following lobbying efforts by big banks, ten Senate Banking Republicans led by Ranking Member Tim Scott sent a letter to Powell last week expressing concern that yet-to-be-proposed capital requirements may not be sufficiently tailored to risk. Brown, along with Senators Katie Boyd Britt and Bill Hagerty, pressed Powell on the issue on Tuesday. Committee Chair Sen Brown asked Powell to commit to maintaining strong capital requirements. HFSC members, Reps. Andy Barr, David Scott, Frank Lucas and Ann Wagner continued to press the issue, with Powell noting that Barr’s assessment reflects a broad examination of the structures in line with a fresh look from a new VCS and committing to a focus on tailoring in any future adjustments.
- Climate Related Regulation – Senate Banking Committee Ranking Member Tim Scott and HFSC Chair Patrick McHenry have sent a letter to SEC Chair Gary Gensler asking him to rescind the agency’s proposed climate disclosure rule requiring publicly traded companies to disclose their greenhouse gas emissions. Committee Republicans also pressed the Fed chair on the central bank’s consideration of testing banks’ ability to respond to climate-related scenarios. Powell reaffirmed his previous statements that the Fed should continue to refrain from engaging in climate policy.
- CRA Reform – Last year, three banking regulators issued proposed updates on the Community Reinvestment Act. Powell confirmed that the Fed, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) are aligned in rewriting rules which may be released within the next few months.
- Crypto – With Congress’s eyes on crypto regulation, Powell faced questions on cryptocurrencies and their potential risks to financial institutions. The Fed chair stated that in monitoring activity within the crypto space, “we see fraud, we see a lack of transparency, we see run risk,” but said that stablecoins regulated similarly to comparable products could have a space within the banking sector.
A soft landing remains in distant sight as the job market continues to appear resilient. Additionally, the risk of default continues to loom and poses a grave threat to tentative progress. The Fed must remain cautious and wary of hitting the breaks too hard as it examines new data in anticipation of March’s FOMC meeting. As AFL-CIO chief economist William Spriggs has pointed out, “there is no period in which the Fed has pursued a deflationary policy in which low-income people won. The median income of black families falls, and it takes years to come back.”