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Powell Testimony Preview: What The Fed Chair May Say Tomorrow

Courtesy of ZeroHedge. View original post here.

Chair Powell is slated to give his semi-annual testimony before the House Financial Services and Senate Banking Committees on Wednesday and Thursday, respectively. His prepared remarks will be released at 8:30 am Eastern on Wednesday morning. As per the usual with these hearings, Powell will be testifying on behalf of the FOMC. Consequently, as Deutsche Bank's Matthew Luzzetti notes, his prepared remarks and the overall tone from his testimony, should largely adhere to the message from – and the intricacies of – the discussion at the June FOMC meeting, the full details of which will be revealed with the release of the minutes to this meeting later on Wednesday.

That said, there have been a few developments since the June FOMC meeting that could give Powell an opportunity to update the Committee’s views in important ways. Two events stand out in particular.

  • One, the G-20 meeting resulted in at least a near-term truce and a possible pathway towards the resumption of trade negotiations between the US and China. While this outcome avoided the worst-case scenario of a breakdown in talks and escalation that includes additional tariffs, it did little to alleviate the uncertainty that Fed officials believe is contributing to cooling momentum in global trade and domestic capex plans, as last week’s Monetary Policy Report made clear. As a result, Powell will likely stick with a cautious line on the impact of these developments on the US outlook, likely noting, as San Francisco Fed President Daly did recently, that failure to remove trade uncertainty will continue to act as a headwind to US growth.
  • The second important development since the last FOMC meeting was the June jobs report, which we have argued featured details that were considerably weaker than the robust headline payroll figures indicate, particularly related to growth in hours worked and aggregate incomes. The June 19 FOMC statement noted that “job gains have been solid, on average, in recent months, and the unemployment rate has remained low.” Powell is likely to reiterate this relatively upbeat assessment of the labor market following the latest jobs data. However, if questioned more closely about the underlying details, we would not be surprised if he were to sound a mild note of caution about the recent downshift in hours worked, particularly in the context of softer wage inflation. Powell also may provide an update on the progress of the Fed’s policy review, a common theme of which has been the benefits of running a tight labor market.

With respect to inflation, it is important to recall what Chair Powell stated in his post-meeting press conference last month: "Wages are rising…but not at a pace that would provide much upward impetus for inflation. Moreover, weaker global growth may continue to hold inflation down around the world…and we are well aware that inflation weakness that persists even in a healthy economy could precipitate a difficult to arrest downward drift in longer-run inflation expectations." This statement details the case for undertaking preemptive rate cuts. On this point, market-based measures of inflation expectations have remained soft and the latest University of Michigan survey showed long-term inflation expectations at all-time lows. With global growth indicators remaining weak, this assessment should remain unchanged, even with some modest upward revisions to core PCE inflation since the June FOMC meeting.

In short, many analysts, and Deutsche Bank in particular, don't expect Chair Powell to tip his hand with respect to the July meeting but rather reiterating the same concerns the Committee highlighted on June 19. If this expectation proves correct, market pricing for a 25bp rate cut at the July FOMC meeting should remain entrenched.

If, however, in a surprising turn Fed leadership has conviction that they will not cut at the July meeting, Powell will need to begin laying the groundwork for this hawkish message. With the  blackout period commencing the following week, and given the FOMC’s penchant for not surprising in a hawkish direction, they should want to soon plant the hawkish seed if that is in fact the direction they are leaning.

MARKET PRICING:

A solid Employment resulted in a significant paring back in the implied probabilities of a 50bps rate cut at the Fed’s July meeting – to just 3.5% from around 27% before the data, though the market is still completely priced for a 25bps cut; money markets now price 61bps of easing through the end of the year, compared to 75bps at the close of business last Thursday (the day before the payrolls report). Some analysts say the real question is not whether the FOMC cuts rates by 25bps or 50bps at the July meeting, but what happens afterwards. Societe Generale notes that before the (weak) jobs data at the start of June, the market was pricing a 40% probability that rates would still be above 2% at the end of 2019, now however, the market is assigning a mere 11% chance, though that has been edging up slightly post-payrolls.


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