At Federal Reserve, There's a New Sheriff in Town
March 5, 2018
By Krista Biernbaum
The Federal Reserve has a new sheriff in town. Janet Yellen’s term as Federal Reserve Chairwoman ended last month and Jerome Powell took over as the new Chairman. Last week, he delivered his first semi-annually testimony to Congress. He testified before the House Financial Services Committee on Tuesday followed by the Senate Banking Committee on Thursday. Prepared remarks are the same both days; what captures headlines is the question and answer period.
Jerome Powell was upbeat and optimistic on the U.S. economy in his testimony, saying his “personal outlook for the economy has strengthened since December.” These bullish comments triggered fears of faster interest rate increases from the Fed; the markets declined on Tuesday. Something to note: depending on market reactions on the first day of testimony, the Chairman will adjust answers accordingly the following day. This is exactly what we saw last week; his hawkish comments on Tuesday were followed by more toned down comments Thursday, noting that he does not currently see the U.S. economy at risk of overheating.
What will influence the path of interest rate increases this year? The answer is inflation. Currently, the Fed is projecting three 0.25% rate increases in the federal funds rate, which is the rate banks charge each other for overnight loans. Investors fear that higher inflation will cause the Fed to raise interest rates faster than its current projections. Market expectations for four rate increases this year has risen, but the odds remain low.
One of the Fed’s dual mandates is price stability. To achieve this, it has a 2% inflation objective. Keep in mind that this objective is not a ceiling; it is just a target. Inflation could fluctuate above and below 2% and this will not alter the Fed’s current path. We believe inflation will rise gradually this year and will not get out of hand anytime soon. Also, with Jerome Powell scaling back his bullish comments, this suggests the Fed will stick to its gradual pace of rate increases this year.
The Fed’s next policy meeting is March 20th-21st. At that meeting, the Fed is expected to raise the federal funds rate 0.25%. Following that meeting, the Fed will release updated economic and interest rate projections. This will give investors a fresh picture of the Fed’s outlook for inflation, economic growth, and interest rates.
It’s been a while since the prospects for higher interest rates focused this much attention on the Fed’s words. Interpreting the nuances of ‘Fedspeak’ used to be a cottage industry on Wall Street. It’s starting up again.
We’ll join others in watching Mr. Powell settle into his role. And, as we do so, please contact us to review your goals and make sure your portfolio remains structured for their achievement.