What He’ll Say

There is an old banker named Jay
Who’ll speak before Congress today
Most analysts doubt
New views he will spout
But all want to hear what he’ll say

Some days, there is just not much to discuss, and today is one of those days. Ahead of Chairman Powell’s testimony this morning, markets have been extremely quiet around the world. The one consistency has been that equity markets have seen a minor bout of profit-taking after their recent recovery rally, but trading volumes appear to be light across the board. As to the dollar, it is virtually unchanged this morning from yesterday’s closing levels, and in truth, has not shown much movement for the past week.

As such, a look at Powell’s testimony and how it may impact the FX and other markets seems to be in order. The biggest unknown is likely to be the style with which he addresses the House Financial Services Committee. Markets have grown accustomed to the combination of obfuscation and circumspection that has defined Fed testimony for the past thirty years (since Alan Greenspan was first appointed). In fact, the only time that a Fed Chair actually broke new ground in one of these events was in 2013, when Ben Bernanke hinted that QE would not last in perpetuity and that the Fed was considering when to stop buying more bonds. Of course the result of that was the Taper Tantrum, a virtual collapse in the price of bonds, and a sharp correction in the price of stocks. And that was the last time a serious discussion of policy was held. But Mr. Powell is not a PhD economist; rather he is a former investment banker and businessman who in his few public appearances thus far, including his confirmation hearings seems to speak a bit more plainly. While I applaud that in any person, there is no question that it opens the door for a bit more volatility in markets. Remember, too, that despite her best efforts, Chair Yellen made a few inadvertent comments in her first two appearances that had market impacts and were subsequently walked back by other Fed members.

So what can he say? It seems likely that in his prepared remarks he will need to discuss the improvement in the economy since the Fed last met in January. It is also likely that he will touch on the increased market volatility we have experienced since then, but I would be surprised if he says anything other than this is normal and of no concern to the FOMC. In other words, my sense is he will try to remove the Fed put from the dialog. He will almost certainly mention the new budget and its added fiscal stimulus in an effort to highlight the potential risks of inflation rising faster than currently anticipated. And I’m sure he will conclude by saying the economy is in great shape and that the Fed is doing a wonderful job meeting its mandates of full employment and stable prices.

Will he touch on the timing of specific policies? Almost certainly not. What about the number of rate hikes the Fed is likely to impose this year? That is a possibility in the context of the discussion about the improvement in the overall economy. I doubt he will even mention the reduction of the balance sheet as that is something the Fed is very keen to keep in the background.

Remember, too, that he will be asked a series of questions by the committee members, almost none of which will be of substance, but a few of which could be tricky. It is in this section of the event that there is the greatest chance for a market surprise. As we saw with both Yellen and Bernanke, sometimes they are ‘too’ honest in their answers and get away from the broad storyline they are trying to maintain.

The thing is, it seems that there are very few things likely to come from the testimony that lean dovish. Given the constant improvements in the economy, there is a growing sense from many members (Bullard and Kashkari excepted) that the Fed may be falling behind the curve in their efforts to moderate building inflationary pressures. If that attitude is displayed, then we could well see a more clearly hawkish result. In that event, look for the dollar to benefit, and both bonds and stocks to fall. But my sense is that Powell will do whatever he can to sound as neutral as possible. In the end, one can be certain that he will discuss data dependence regarding Fed actions. And so as we look ahead to the data tomorrow and Thursday, any further indication that inflation is rising faster than previously forecast ought to result in further pressure on equities and bonds and further strength in the dollar. But we will need to see that data to respond.

As to today’s data, Durable Goods (exp -2.0%, +0.4% ex transport) and Case Shiller Housing Prices (6.3%) are on the docket, but will likely not see much response given the Powell testimony. The market response today will be entirely dependent on what he says, and until then, there is likely to be little price action at all.

Good luck