Fed chairman faces questions on economy, Trump criticism
Lawmakers likely to grill Jerome Powell on rate decisions and financial regulation
When Federal Reserve Chairman Jerome Powell heads to Capitol Hill for two days of hearings this week, he will face an economic and political backdrop greatly changed from when he gave his congressional testimony in July.
Mr. Powell’s testimony will be made public at 9:45 a.m. EST on Tuesday, and his hearing before the Senate Banking Committee is set to begin around that time. He appears Wednesday before the House Financial Services Committee, which is controlled by Democrats for the first time since he joined the Fed in 2012.
When he testified in July, the economy was expanding strongly amid buoyant business and consumer sentiment and a boost in fiscal stimulus. The Fed hadn’t encountered much political resistance to its plans to gradually raise interest rates.
Since then, President Trump has often criticized the Fed’s rate decisions, forcing Mr. Powell to repeatedly assert that politics have nothing to do with how the central bank sets policy. And the economy has shown signs of slowing more than had been expected last year.
Lawmakers are likely to question Mr. Powell on policy, the economy, financial regulation and other topics. Here’s what to watch for during the hearings: Rate Outlook Fed officials raised rates in September and December, but this year have put further increases on hold until they can better judge the effects of economic risks.
Weaker global growth in Europe and Asia, trade tensions and other political uncertainties, and market turmoil that accelerated late last year are all headwinds that could cause the U.S. economy to slow more than officials already anticipate.
Minutes from the Fed’s Jan. 29-30 policy meeting suggest more officials are particularly focused on whether inflation pressures will overcome the dampening effects of weaker demand abroad, a stronger dollar and oil price declines.
Some officials still expect the Fed will have to raise rates later this year, but Mr. Powell hasn’t indicated how high a bar he sees for another increase. Inflation Equation For years, the Fed raised rates under the view that a falling unemployment rate reflected declining slack across the economy that would ultimately yield stronger price pressures. This required the Fed to raise rates pre-emptively to keep a lid on inflation, even though it was holding below its 2% target.
Some officials have indicated they see little need to raise rates absent stronger signs of inflation. Others have argued they think rates are still low enough to spur growth, and that the models that have guided the Fed shouldn’t be completely set aside. Policy Framework Fed officials are embarking on a monthslong review of how they meet their goals to maximize employment and maintain stable prices, which they define as 2% inflation.
Last year, Fed officials began to project a modest overshoot of the 2% goal, but this hasn’t materialized. Some officials have called for revising how they define the target to prevent expectations of future inflation from drifting lower.
Mr. Powell isn’t likely to prejudge the outcome of this review, but he could offer clues about any ideas he thinks are likely to merit consideration. The Balance Sheet Fed officials have indicated they are ready to end the runoff of their $4 trillion asset portfolio later this year. Officials have said they plan to continue shrinking their holdings of mortgage securities even after the runoff ends, leaving primarily Treasurys.
They have yet to decide, however, where along the maturity distribution they should target future purchases of Treasurys. This will be important to credit markets and the economy more broadly because Fed officials have long argued that the duration, as opposed to the volume, of their holdings provided more or less stimulus. Powell’s ‘Lane’ Members of Congress often treat the Fed chief as the CEO of the economy, peppering him or her with lots of questions on issues other than the Fed’s primary duties, which are monetary policy and bank regulation.
Mr. Powell sometimes parries inquiries about tax, trade or immigration policy by noting that he doesn’t want to stray “out of my lane.” This reflects Mr. Pow- ell’s view that the best way to protect the Fed’s independence on monetary policy is to avoid opining too much on other topics.
Preserving the Fed’s independence—and more broadly, enhancing the central bank’s standing as a nonpartisan institution that provides clear analysis—remains one of his top priorities. Mr. Powell’s interactions with members of Congress, including some Republicans who have been apprehensive about Mr. Trump’s criticisms of the Fed, could illustrate his degree of success so far in bolstering the central bank’s political standing.
Mr. Powell could face questions from lawmakers over his dinner earlier this month with Mr. Trump. Look for Mr. Powell to repeat his commitment to nonpartisan analysis.