Powell Stands Strong In Accommodative Posture At Testimony

FS Insight Team

Federal Reserve Chairman Jay Powell testified before Congress this week and, as usual, stuck to the expected talking points. He was pressed particularly hard on inflation by Republican lawmakers. You may or may not be surprised by what he said, but essentially it is more of the transitory narrative. Opposition to runaway inflation has, after all, probably been amongst the most potent political forces in history. Just ask Louis XVI. Nonetheless, Powell and the governors remain publicly confident that most sources of rising prices are transitory and unique to the economic re-opening and anomalous demand patterns.

The hearing had many potential stumbling blocks but the seasoned Powell by now knows his way around a hearing. One lawmaker pointed out that he mentioned inflation would be temporary six months ago, and that families paying high prices don’t necessarily appreciate the “transitory’ argument as much as the financial media does. It will be interesting to see whether or not this issue resonates as effectively as in the past with the most financially healthy US consumer in recent history.

While the conversation about tapering is certainly in full stride, according to Powell, the act is still far-off. As we mentioned last week, there is growing rumblings on the board evident in the minutes that the purchase of Mortgage Backed Securities (MBS) isn’t looking like it’s necessary in the hottest housing market on record by many metrics. To date, little evidence has emerged that the perverse incentive of front-end mortgage personnel to search out low-credit quality borrowers is repeating itself. After all, between now and the 2008 Housing Crisis, the largest financial overhaul since the 1930s was passed particularly targeting the probelematic incentives.

The Fed also released the Beige Book this week, which is a highly informative data source with real world feedback and expectations from various businesses around different Federal Reserve Districts. Despite Chairman Powell’s calm, cool and collected demeanor in the political hot seat, the Beige Book is suggesting that its not only Republican lawmakers with serious concerns about inflation.

The report stated “While some contacts felt that pricing pressures were transitory, the majority expected further increases in input costs and selling prices in the coming months.”In addition to this fear, many businesses reporting major difficulties in hiring and empowered workers quitting and leaving positions at a historically elevated pace.

The economy continued to grow at a moderate to robust pace in the various districts. Inflation rose to its highest level in 13 years in June at 5.4%, although, as Powell said, many of the direct sources of these gains are concentrated in a very small group of goods and services.

The Beige Book also found elevated spending and in the many foregone goods and services restricted or unavailable during lockdowns. Travel has been a particular beneficiary with demand for outdoor travel destinations, air travel and hotels reaching historically high levels.

Asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries. The benchmark yield on the 10 year is 1.30%.

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