Fed Chairman Powell tasked with convincing Congress this week that easy politics are still needed

Federal Reserve Chairman Jerome Powell is tasked this week with convincing Congress that the super-easy policies followed by the central bank during the pandemic are always the right ones.

It might not be such an easy task this time around.

While Powell’s talks with Congress have been particularly brilliant business, there’s at least a chance this time around that the questioning could get a bit sharp. Some congressional leaders, particularly on the Republican side, have pushed the Fed to start loosening the policy pedal, especially with the $ 120 billion a month bond purchases still at stake.

Powell will then have to show that an economy that is improving rapidly and facing its highest inflationary pressures in more than a decade still needs crisis-level policies to get out of it.

“The last time he spoke [on June 22] was before the House financial services committee. It was a complete waste of time, ”said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “Few people challenge him. That’s the problem with these testimonies and appearances in Congress. “

Indeed, Powell only occasionally faces a tough question or two during his appearance on Capitol Hill, as he will on Wednesday and Thursday when he delivers his biannual testimony on the state of monetary policy.

The Fed’s response to the Covid-19 crisis last year, in which it deployed an unprecedented set of tools to tackle market turmoil and economic turmoil, has generally received notes brought up in Congress.

But things are changing.

The economy is pretty much back to what it was before Covid, at least in terms of GDP, the stock market has continued to soar and inflation is rising. A consumer survey conducted by the New York Fed on Monday indicated that inflation expectations are the highest they have been in at least eight years, and this has come against a backdrop of continuously rising prices. housing prices that sparked bubble fears.

“I hope he will be asked a question about accommodation,” Boockvar said. “Housing is obviously the part of the economy most sensitive to rates and therefore the most directly influenced by monetary policy.”

If things go according to past discussions between Powell and Congress, he will likely say that the Fed is monitoring the housing market closely for signs of overheating, but is not seeing any yet.

However, the sentiment of the members of the Federal Open Market Committee is changing.

At the June meeting, the group advanced the first post-crisis rate hikes to 2023, and was only one “point” away before moving on to next year, which the market is already pricing. Some itchy trigger fingers on the FOMC could make Powell’s job more difficult.

“It’s definitely tough for them now,” said Tom Graff, head of fixed income at Brown Advisory. “They cannot know how transient current inflation is. Some are certainly transient, but others are not. Therefore, they have to be careful what they promise. They cannot afford to be too specific about the duration may be willing to leave the policy so accommodating. “

More recent releases of Fed documents show a central bank with little certainty about the future course of inflation in particular and the economy in general.

The minutes of the June meeting were filled with equivocation about how FOMC members saw the road ahead. A report that Powell will present with his testimony, released Friday, noted that “the upside risks to the near-term inflation outlook have increased” although policymakers remain confident they will eventually fade.

At the same time, the Powell Fed has focused on the employment aspect of its dual tenure. As part of its current mission statement, the central bank is seeking a return to employment that is both comprehensive and takes into account race, gender and income. While the unemployment rate is well below its Covid peak, the current level of 5.9% is still considerably higher than the pre-crisis rate of 3.5%.

Powell’s “level of confidence that the labor market will make ‘further substantial progress’ could be an indication of his level of support for a more rapid onset of the reduction” in monthly asset purchases, he wrote. Citigroup economist Andrew Hollenhorst.

Boockvar has said he hopes, but does not expect, that Powell will provide a clear path out of the current level of political support.

“It’s overkill. The politics that were good a year ago aren’t good now, and in fact you can argue that they made it too hot,” Boockvar said. “A classic too much money for too few goods is at stake here. We have no problem of demand, we have a problem of supply.”