Jerome Powell Has to Walk a Fine Line in Congress Today

Jerome Powell Has to Walk a Fine Line in Congress Today

U.S. Federal Reserve Chair Jerome Powell begins two days of testimony in Congress today. It will be closely watched with some key issues at stake.

The event begins at 10 a.m. ET. Leading members of the Financial Services Committee such as Maxine Waters are likely to speak for 10-15 minutes initially. Then traders will tune in for Powell’s prepared statement.

The big question focuses on the central bank’s July 31 meeting. Will the Fed cut interest rates as the market expects? Powell may confirm this belief by speaking of economic weakness or low inflation. Or he can signal the opposite by highlighting the strong labor market, especially after last week’s employment report.

10-year Treasury yield ($TNX.X), weekly chart.
10-year Treasury yield ($TNX.X), weekly chart.

The central bank’s credibility and independence are the next big major issue. Pundits worry about the Fed caving to pressure from the President Trump, who hates last year’s rate increases. But on the other hand, Powell has already signaled a halt and possible reversal to the policy.

This will probably force the chairman to play politics. He could make strong statements about the importance of the Fed’s autonomy while also repeating the reasons why he personally spearheaded the flip-flop last November.

Currencies and Inflation

This raises the two real issues most commentators downplay: currencies and inflation.

The Fed doesn’t exist on a vacuum. Global interest rates have steadily collapsed since October because of slower growth and actions by other central banks. If the U.S. ignores other countries, it would likely cause the greenback to rally against most other currencies.

That, in turn, would impact U.S. exports. It could also trigger a potential crisis similar to the 1997-98 Asian meltdown, hurting U.S. investors and companies with holdings overseas. Regardless of what the talking heads say about Trump and politics, this is the real question facing Powell: Does he want to cause a global currency crisis?

U.S. Dollar Index (@DX), weekly chart.
U.S. Dollar Index (@DX), weekly chart.

A lack of inflation is the other big issue. Most U.S. consumer- and producer-price reports have missed estimates over the last year. While the reasons aren’t super clear, the conclusions are clear: Less inflation means interest rates can stay lower for longer.

Remember 1995

Ironically, despite getting a lot of attention at the moment, it might not take investors very long to hit the “mute” button on Powell today. After all, the bigger issues of low inflation and low interest rates overseas will remain in place regardless of what he says. There’s also a flood of quarterly earnings reports before the July 31 meeting.

Investors may want to take a step back and consider the bigger picture. At least two surveys showed money streaming into safe-haven bond funds last month as the market panicked about tariffs and slower growth. Then the S&P 500 hit new highs as worst-case scenarios evaporated.

People also feared a recession back in 1995, but then the Fed stopped raising rates and moved toward cuts. Pretty soon equities broke out to new highs and launched onto one of their most famous rallies ever. Remember the adage about bull markets climbing walls of worry. Regardless of what exactly Powell says or does today, this bigger trend may still be playing out.

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