This guest commentary was written on February 23, 2021 by Chief Market Strategist Mike O'Rourke of JonesTrading.
Chairman Powell gave his Humphrey Hawkins testimony before the Senate Banking Committee today.
While it is understandable that virtual hearings are not ideal, there were multiple instances where there was no Senator available to ask a question.
It is likely a sign of the new heights of financial market complacency when the Central Bank's legislative overseers don’t remain engaged in their oversight hearing.
Regardless, Chairman Powell sent the unequivocal message that FOMC will remain exceptionally accommodative beyond the foreseeable future.
There were several questions in which Senators referenced asset prices or bubbles, and Chairman Powell continued to indicate that is not an area of concern for him. Early on, Ranking Member Toomey asked “So I guess my question is, do you believe that there is a link between the liquidity that the Fed has been providing and some of these unprecedented asset prices?” Powell responded, “So there's certainly a link….”
The Chairman then went on to expand his answer citing a multitude of reasons, particularly vaccines, economic reopening and fiscal stimulus, among others that are driving asset prices.
The Fed Chairman painted a fairly simple picture. The FOMC will not be adjusting policy until inflation is on a path to move above 2% on a sustained basis and the country is approaching full employment.
With respect to asset purchases, he told Senator Toomey, “Well, so what we said about the bondbuying program is that it will continue at the current pace -- at least at the current pace until we make substantial further progress toward our goals. And we've also said that as we monitor that progress, we'll communicate well in advance of any actual change in purchases.”
Later, the Fed Chairman was asked directly if his three conditions - full employment, 2% inflation and projections of future 2% - needed to be met before raising rates? Powell answered in the affirmative that they must be met.
So much for monetary policy operating with a lag.
Other key factors such as fiscal stimulus, 4% to 6% 2021 GDP forecasts, asset bubbles and financial stability do not appear to play a role in the decision making.
None of this is new or surprising.
What is surprising is that the Chairman acknowledged that the inflation target is nearly impossible to achieve given the structural composition of the US economy.
“We've averaged less than 2 percent inflation for more than the last 25 years. Inflation dynamics do change over time, but they don't change on a dime. And so, we don't really think how -- see how a burst of fiscal support or spending that's not -- that doesn't last for many years would actually change those inflation dynamics.”
In response to another inflation question later Powell responded, “We'll also see, perhaps, we don't know this, but we may see upward pressure on prices as the economy fully reopens, a good problem to have. I don't think that those effects should either be large or persistent. And the real reason for that is that we've had decades of well-anchored inflation expectations, meaning that we've had a very volatile economy for the last 15 years and inflation has just kind of done what it was going to do, it didn't go up.”
It is remarkable to see the Fed Chairman talk about prices being too stable over the past couple of decades as if it is a negative and he has forgotten it is the FOMC’s mandate.
Simultaneously, Powell asserts he will indefinitely pursue exceptionally accommodative monetary policy regardless of the circumstances too jolt that mandated price stability.
The most alarming aspect of all today’s testimony were Powell’s comments on asset bubbles.
He asserted, “You know, I wouldn't comment on any particular - - on bubbles, we're not -- no one can really identify them. For any particular asset even now, you know, people have different perspectives, for example, in the equity market there's some who say there's a bubble. Others say if you look at it this way there's a lot of -- we don't have -- I don't have an opinion on that for this purpose.”
The word bubble in relation to asset prices was mentioned 9 times in today’s hearing.
While Powell claims he does not know when to worry, it is clear some of our nation’s legislators are alarmed. Powell’s bubble denial is one of the most dangerous things a central banker can do.
Powell created the bubble, fuels it daily and now he ignores its existence by pretending valuation metrics well in excess of 2000 are market forces.
Powell is feigning ignorance to avoid accountability for the mess he has created and the disaster it will become. When this bubble bursts which it most certainly will – it will undermine both full employment and price stability. Most noteworthy is that it will undermine financial stability that can do lasting damage to the US and global economy.
Powell can choose to be responsible; he has clearly chosen not to.
This is a Hedgeye Guest Contributor piece written by Mike O'Rourke, Chief Market Strategist of JonesTrading, where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.” This piece does not necessarily reflect the opinion of Hedgeye.