Mon Mar 11, 2024
Chairman Powell gave his semi-annual monetary policy testimony on Wednesday before the House Financial Services Committee and on Thursday before the Senate Banking Committee. His introductory remarks were fairly short.
The key points he made were designed to reinforce the fact that the FOMC was focused on its 2% inflation target and that inflation and employment goals are the committee’s primary objectives. He noted that GDP growth was 3.1% for the year in 2023, supported by solid consumer demand. Job growth was solid, averaging 239,000 jobs per month, with unemployment at a near-historic low of 3.9%. Job vacancies declined even as wage growth slowed. As for monetary policy, he stated that the committee’s target range for federal funds peaked at 5.25% to 5.5% and that the Fed continued to shrink its balance sheet. The one key note on future policy in the statement was that if the economy evolves as the committee expects and there is further progress toward getting inflation down to 2%, the committee would likely start cutting back its policy rate later in the year.
The lines of questioning that occurred in the House and Senate hearings were largely similar and reflected the different views held by the competing political parties. Remarkably, there were very few questions about monetary policy itself. Instead, there were a lot of questions about regulatory policy, housing, the costs of inflation to citizens, and problems associated with the fiscal debt. More specifically, a number of participants from both sides of the aisle were concerned about the impact of the proposed extension of capital requirements to more banking institutions under the proposed but not yet adopted Basel III capital standards. Clearly, many institutions likely to be covered by the requirements have devoted significant resources to complain to representatives and senators about the proposals. Powell deflected most of the complaints, arguing that the standards were not yet finalized and public comments were being reviewed. Of course, any changes would require action by all three banking regulators and not just the Federal Reserve.
Considerable attention was devoted in both sessions to the impacts of inflation on both residential and commercial real estate. Comments focused on the links between the Fed’s policy tightening, the increases that tightening meant for increased interest rates, the financial problems that new home buyers faced, and the fact that homeowners with ultra-low interest rates were deterred from selling their homes to trade up because of the increased mortgage rates they would face. At the same time, concern was expressed about commercial real estate vacancy rates and their spillover effects on economic activity and, interestingly, on the risks that vacancies and defaults might pose to lenders, especially smaller banking institutions. Participants wanted to know if the Fed was concerned about these problems and what it could do about a them. Again, Powell indicated that the Fed was monitoring the situation but its focus was on its dual mandate of stable inflation and full employment and it could not target specific sectors or industries. With respect to the concerns about financial stability, the Fed is in constant contact with regional banks and smaller institutions regarding their capital and liquidity positions and plans should real estate defaults occur.
Powell was even questioned about fiscal policy and its role in causing the inflation we were experiencing. Republicans repeatedly blamed the current administration for excessive spending, resulting in serial increases in the national debt and heightened inflation. One point that Powell whiffed on concerned the link between the growth in the Fed’s balance sheet as government debt rose and the increases in the money supply and spending. He denied that the Fed was helping to finance the deficit. But he missed that the increase in the Fed’s balance sheet resulted from its purchases of Treasury debt from the public, which also increased bank reserves and high-powered money. In a sense, that activity substituted Treasury debt held by the public with an increase in outstanding Fed liabilities in the form of bank reserves and money held by the public. In effect, the Fed was helping the Treasury fund its outstanding debt.
Only a couple of participants questioned Powell about where the Fed stood with regard to the current policy situation and the performance of the economy. One senator in particular asked whether the Fed still thought a soft landing was not only possible but had been achieved. Powell declined to say that success had been achieved but did cite the progress on inflation, the solid job market, and GDP growth that is above trend.
All in all, the two sessions served to indicate how little the senators and representatives know about the Fed and monetary policy, despite the numerous appearances that Chairman Powell and his predecessors have made before their committees.
Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.
Sign up for our FREE Cumberland Market Commentaries
Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.
