Yesterday, Chairman of the Federal Reserve Board, Jerome Powell began the first of his two-part testimony before Congress.
Yesterday, before the House Committee on Financial Services, today before the Senate Banking Committee.
The Fed Chairman provides this testimony twice a year, and it is perhaps the most important and detailed presentation by the Federal Reserve of their current monetary policy.
This is all part of a process by the Congress to fulfill their oversight the obligation of the Federal Reserve. But it is also an opportunity for the Fed Chairman to outline what he sees in the economy, and how the Fed is seeking to meet its twin goals of full employment and stable prices.
And on those two measures, things have been looking very good for a long time now. Unemployment, the flip side of the employment coin, is at or near historic lows. Meaning that the Fed's objective of full employment is on target.Inflation is also well under control.
In fact, the economy has operated so long with low inflation, that the Fed would actually like to see inflation heat up just a little, to help provide some additional price momentum in the economy.
Now it's important for investors to be aware of these Macro Dynamics of the economy. These two factors, full employment, and low inflation, combined with growing corporate earnings, have made up the dominant driving factors of this bull market in stocks, which has now reached 11 years. One of the longest bull markets in history.
The only reservation Powell seemed to have for the domestic economy, was the softening he noted in the manufacturing sector. Although he does not see that as significant right now.
However, when he turned to the Global Economy he noted the weakness in both the European and Asian Economies. This weakness began back in 2018, according to Powell. And was due to a slump in Global Manufacturing, trade tensions, and political unrest in several countries.
That comment on “Trade Tensions” was no doubt, Powell's way of saying that he's not entirely on board with the Trump Tariffs.
Here Powell also acknowledged the potential impact of the Coronavirus in China. An important recognition, that the Fed may need to be accommodating in its monetary policy if this pandemic should continue to grow.
Finally, and most importantly from my perspective. The Chairman acknowledged that the Fed's Balance Sheet transactions should be consistent with their monetary policy.
In fact, a special addendum to the testimony on this topic was provided by Chairman Powell. Briefly stated this is a recognition, by the Fed, that their actions in buying or selling securities, need to be roughly equivalent to their interest rate policy.
If the Fed is being accommodative by lowering interest rates, they should also be accommodative in their open market actions.
In other words don't lower interest rates, while you withdraw funds from the system.
This is a big deal. And about a year ago, during that period the Fed called “Normalization” the Fed's interest rate action was mildly restrictive, but its open market action was dramatically restrictive. Drawing down system reserves rapidly.
So that while from an interest rate perspective it looked like not too much was happening. From a reserve perspective, there was dramatic tightening going on.
This statement by the Fed Chairman will do a long way in having a consistent Fed Policy going forward.