Happy Tuesday AM,
The biggest news today comes from Fed Chairman Powell’s reconfirmation hearing. Let’s not forget Mr. Powell sits on the right side of the aisle (pun or no pun as you prefer). He is going to be confirmed for another term as Fed Chairman by a left side dun congress and White House. He must be doing a good job (despite the pain we’ve been feeling this year in the rate market). Today was his grilling with congress and with his testimony, he seems to have calmed markets a bit. Bond market is settling down and equities are up. Here is a little bit of the commentary (as a side note, for anyone thinking that Covid is past us, we continue to set new records for cases, hospitalizations and deaths; not to forget the number of businesses that are impacted by sick employees and supply chains which are further impacted. This will be a drag on Q1 GDP, that I can tell you). Tomorrow though we do run the CPI gauntlet. If inflation (CPI) comes in with a 7 handle (expected at 7.1%), we could see more selling in bonds).
Regarding the Powell reconfirmation from the WSJ (I highlighted some of the more important points):
Federal Reserve Chairman Jerome Powell said he was prepared to begin raising interest rates to cool down the economy but that he also was optimistic that supply-chain bottlenecks would ease this year to help bring down inflation. The central bank will use its tools “to prevent higher inflation from becoming entrenched,” Mr. Powell said Tuesday at his confirmation hearing before the Senate Banking Committee. Mr. Powell, a Republican, is expected to win a second term leading the central bank but was pressed during the hearing over how the central bank will tighten policy to combat inflation, which is running near its highest annual levels in four decades. Mr. Powell said he hoped there would be “a return to normal supply conditions” this year but added, “if we see inflation persisting at high levels longer than expected [and] we have to raise interest rates more over time, we will.” “What we have now is a mismatch between demand and supply. We have very strong demand in areas where supply is constrained,” such as for cars, he said. The main question for the Fed this year boils down to “how are those two things going to get better into alignment,” he said. “A part of the answer is going to be through shifts in demand.” The Fed typically lowers interest rates to boost demand and spur more growth, and it raises them to slow down the economy and curb demand. Mr. Powell and his colleagues at their meeting last month penciled in three quarter-point rate increases this year, and over the past week, they have signaled those rises could start in March. The Fed cut short-term interest rates to near zero and started buying bonds to lower long-term rates in 2020 as the coronavirus pandemic hit the U.S. economy, triggering financial market volatility and a deep, short recession. Mr. Powell told lawmakers the economy no longer needs aggressive stimulus but that it would take time for the central bank to return interest rates to levels that prevailed before the pandemic. “It is really time for us to move away from those emergency pandemic settings to a more normal level,” Mr. Powell said. “It’s a long road to normal from where we are. ”Mr. Powell has been trying to balance two risks over the past year: raising interest rates prematurely and risking a prolonged period of elevated unemployment, or providing too much stimulus that allows higher inflation to become entrenched, forcing a faster adjustment later. Fed officials were wary last year of overreacting to one-time price increases by raising rates and cooling down the labor market if supply-chain bottlenecks were a primary driver of inflation and were expected to reverse themselves over time. Over the first half of 2021, they highlighted how the economy was employing millions fewer workers compared with February 2020, just before the pandemic hit the U.S. economy. But Mr. Powell unveiled a policy pivot in late November, amid signs that the labor market was tightening. He began to signal greater concern that demand was stronger than expected and might fuel broader and sustained price pressures, even if idiosyncratic increases due to supply problems reversed later. Mr. Powell has said that using pre-pandemic labor market benchmarks might no longer be appropriate to guide officials’ policy decisions, another clue that rate increases could start in March. “We can begin to see that the post-pandemic economy is likely to be different in some respects. The pursuit of our goals will need to take these differences into account,” Mr. Powell said. Monetary policy needs to “take a broad and forward-looking view, keeping pace with an ever-evolving economy.”
Please remain safe and healthy.