Senate hearing shows Fed chair nominee acts the part

Senate hearing shows Fed chair nominee acts the part
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Monday, in his Senate confirmation hearing, as expected, Federal Reserve Governor Jerome Powell signaled ongoing support to current Fed policy, suggesting the new Powell-led Fed would deviate little from the current slow and "gradual" pathway to higher rates, as well as a slow and controlled wind down of the Fed’s balance sheet.

In prepared remarks given to the Senate Banking Committee, the Federal Reserve Chair nominee said, "Our aim is to sustain a strong jobs market with inflation moving gradually up toward our target. (We furthermore) expect interest rates to rise somewhat further and the size of our balance sheet to gradually shrink."  

Regulation

During the question-and-answer session, Powell went on to reiterate his stance on deregulation, as well as the need for further growth and investment in the domestic economy. Responding to Sen. Elizabeth WarrenElizabeth Ann WarrenSenate Dems protest vote on controversial court pick Dems call for hearings on Trump’s CFPB nominee to be put on hold Dems to propose legislation to prevent ICE from shackling pregnant women MORE (D-Mass.), Powell noted that he couldn't think of any rule that should be "toughened."

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Instead, Powell suggested that at this point, he and some others on the Federal Open Market Committee (FOMC) would welcome a review and discussion and in some instances, a simplification of the multitude of rules and restraints put in place following the financial crises that have placed an undue burden on the industry.

 

In other words, new regulatory provisions, which have numbered in the thousands since 2008, at least in Powell’s opinion, may have overreached in the aftermath of the Great Recession, swinging the pendulum of government oversight too far.

Powell later added that he looks forward to working with Randall Quarels, the new vice chairman of Supervision, recently appointed to the committee on Oct. 5. Quarels, little known to the market, has spoken out recently as well in favor of further deregulation:

“In some ways Dodd-Frank was not ambitious enough, and in other ways it was overly ambitious, and I think there are lots of ways to refine Dodd-Frank and other forms of regulatory policy in ways that would be beneficial to the economy.”

Economy

Speaking on the state of the economy, Powell reaffirmed that the majority of the FOMC views the labor market at or near full-employment.

He tempered his optimistic assessment, however, noting that the data are hardly all pointing in the same direction, suggesting there remains some discrepancies and lingering concerns among at least some on the Federal Reserve Board as to the strength and/or sustainability of the recovery, particularly on the labor market font.

Powell offered specific examples of where the data suggest the labor market is still awash in liquidity, including persistently sluggish wage growth and still-dampened prime-age worker participation rates. After all, while modestly elevated above the 2.1-percent trend established since 2009, wage growth is hardly indicative of a tight labor market.

Furthermore, while improved from a low in 2015, the prime-age worker participation rate, which includes individuals from 25 to 54, remains depressed. 

Rates

While falling short of committing to a December rate hike, the presumed incoming chairman asserted that the case for a third-round increase at the end of the year is “coming together.”

Noting that decisions on monetary policy are never made in advance of a fruitful discussion among committee members at the time of the FOMC meeting, Powell suggested one additional rate hike in 2017 appeared to be justified by the current pace of economic activity.

According to Bloomberg, the probability of a Dec. 13 rate hike is near certainty, at 96 percent as of late Wednesday morning.

Demeanor

Overall, Powell voiced support for a faster growth target above today’s moderate pace. More tolerant of a stronger pace of GDP, Powell furthermore suggested the need for monetary policy to support additional business investment, labor force participation and productivity improvements in order to avoid the “low-growth trap.”

Additionally, unlike some nominees before him, Powell was calm and articulate throughout the two-hour testimony, offering in many cases clear one word, “yes” or “no” answers.

Several senators attempted to bate Powell with questions on tax policy and the plight of the middle class but Powell solicited no emotional response or indications of uncomfortability. He simply reiterated that neither the committee nor he personally had a stance on the president’s tax bill.

Later, Sen. Dean HellerDean Arthur HellerSenate Dems build huge cash edge in battlegrounds Jacky Rosen hits Dean Heller over health care in first negative ad GOP moderates hint at smooth confirmation ahead for Kavanaugh MORE (R-Nev.) told Powell, “You’re about to become the most important economic policymaker in the world. How do you feel about that?” Powell, with little expression on his face replied, “I feel fine.”

Having been confirmed to the Senate twice before in 2012 and 2014, the process is expected to be relatively smooth, resulting in an easy and overwhelmingly supportive confirmation of Governor Powell to chairman.

If confirmed, Powell’s term as chairman would extend from 2018 to 2022, while his term as governor does not expire until Jan. 31, 2028. 

Lindsey Piegza, Ph.D., is the chief economist for Stifel Fixed Income. She has had her research published in Harvard Business Review and in textbooks for Northwestern University's Kellogg Graduate School of Management. She's a regular guest on CNBC, Bloomberg, Fox News and CNN.