Will Powell Reiterate His Comment that He Does Not See Inflation Surprising to Upside?

There are no major U.S. economic reports on Tuesday, but comments from Fed Chair Jerome Powell at 1645 GMT could move the markets if he goes off topic or if he adds to remarks he made at last week’s press conference following the Fed’s interest rate decision and monetary policy statement.

Powell is scheduled to deliver remarks at the 60^th NABE annual meeting in Boston. He is expected to comment on the outlook for inflation and employment. However, my guess is that he goes a little off topic and comments on the trade dispute between the United States and China and its potential impact on the U.S. economy.

I think he’s going to lose the audience if he continues to harp on the strength of the U.S. economy, and his chosen topics:  inflation and employment. After all, how much has either changed since last Wednesday?

If you recall, in last week’s press conference shortly after the Fed hiked rates for a third time in 2018, Powell said he does not see inflation surprising to the upside, noting:  “It’s not in our forecasts.” Stock market traders read this comment as dovish which sent interest rates lower, along with bank stocks. At the time, the 10-year yield fell to 3.06 percent and shares of J.P. Morgan Chase, Bank of America and Citigroup all dropped more than 1 percent.

Powell could move the markets later today if he reiterates this comment, or if he offers a further explanation. I think Powell may try to clarify the issue a little because if the Fed sees no surprise move to the upside in inflation then why continue to lift rates at least once more in December or possibly three times next year? It seems a continuation of the gradual approach to raising rates would make more sense.

If Powell does seek to clarify this issue then he runs the risk of creating a volatile response in the financial markets today if he complicates matters. Nonetheless, if you are going to listen to his speech then you should watch for comments on this specific issue.

On Monday, Federal Reserve Bank of Minneapolis President Neel Kashkari fired a shot at last week’s Fed interest rate decision when he said that he sees no need to increase U.S. interest rates, given the “flashing yellow” signal from the bond market and the fact that the economy is not in his view yet at full employment.

Kashkari is not a voter this year on monetary policy, but his comments show he is likely opposed to the decision, citing the message he sees in slow-to rise longer-term rates even as the Fed has lifted short-term rates.

“The bond market is saying, ‘hey we’re not so sure that the U.S. economic growth is going to be very strong in the future years,’ so that’s a nervousness for me,” Kashkari said. “What I’m paying attention to is, are we overdoing it with our interest rate increases?”

We have Powell saying he doesn’t expect a surprise jump in inflation and Kashkari saying the economy may not yet be at full employment. These represent the Fed’s mandates, which are inflation at 2% and unemployment at 5 percent or lower. It seems to me that perhaps the Fed should consider taking its foot off the gas at least in December especially if the trade dispute between the U.S. and China is still a major issue. At some point, the impact of the tariffs are going to have to hit home.