There will be no shortage of topics for Federal Reserve Chairman Jerome Powell’s press conference on Wednesday, analysts said.
The post-meeting press briefing “figures to be one of the most lively post-meeting press conference of any Fed chair seen to date,” said Richard Moody, chief economist at Regions Financial Corp. in Birmingham, Ala.
While on the surface, the economy is looking strong, questions about the outlook.
There has never been a stimulus at the end of a tightening cycle. The $1.5 trillion Trump tax cut package and $300 billion increase in federal spending are just starting to have an impact on the economy and estimates vary widely about the road ahead.
Here are five questions that Powell might face:
Is Bernanke right that the economy is Wile E. Coyote and what, if anything, can the Fed do about it?
Former Fed Chairman Ben Bernanke said last week the stimulus is coming at “the very wrong moment” for the economy.
He said he was worried the stimulus would boost the economy in a big way this year and next but then in 2020 the economy would be “Wile E. Coyote is going to go off the cliff” as the stimulus is withdrawn.
His observations were echoed in MarketWatch interview with former Treasury Secretary Jacob Lew.
Could there be an outbreak of inflation like the 1970s?
Former Richmond Fed President Jeffrey Lacker was fond of warning that there were striking parallels between this economic expansion and the mid-1960s. He noted that in 1964 and 1965, the unemployment rate was falling and resource utilization was tight, but inflation was low and there was an active debate about the degree of remaining slack. The Fed raised rates just twice in two years. What followed was some guns and butter fiscal policy and the disastrous inflationary experience of the 1970s, Lacker said.
Cleveland Fed President Loretta Mester said she doesn’t think the Fed is behind the curve. She says that continued gradual rate hikes are necessary and the central bank will be watching the data closely for any outbreak.
Some combination of the Italian political crisis, emerging market sovereign debt turmoil and trade war fears have scaled back market expectations for further Fed moves, according to analysts at Datatreck. So how seriously does Powell view these developments?
Political turmoil in Italy in early in June led to questions about the sustainability of the euro-zone and a flight-to-quality rally in Treasurys, pushing the 10-year Treasury note
yield 15.9 basis points lower to post its biggest one day drop in almost two years. Stock markets
also dropped sharply. Markets lowered expectations that the Fed would hikes from four times to three as a result of the shock waves. The head of India’s central bank has also complained that the Fed’s shrinking of its balance sheet is hurting emerging markets. On top of all this are fractious trade relations between the Trump White House and allies and adversaries alike. There is little doubt that Powell’s opinions of these developments will be of interest to investors.
Has the Fed already done enough?
Dovish members of the Fed board are pointing to the flattening yield curve as a sign that the Fed has already brought rates to a “neutral” level that neither boosts or deters growth. They argue that further moves might tip the economy into a downturn. Others on the Fed, like Governor Lael Brainard, have argued that special factors were weighing on the yield curve, including the Fed’s bond-buying program.
Is the Fed planning to do too little?
Jan Hatzius, chief economist at Goldman Sachs, notes that the unemployment rate has fallen to 3.8% in May from 4.1% in March when the central bank last issued forecasts. He thinks the Fed will have to trim its unemployment forecasts again and ultimately have to hike the federal funds target rate to between 3.25% and 3.5% to slow growth to a sustainable pace.
At the moment, the Fed sees the terminal rate at 3.4% while the market thinks the Fed will finish when rates get to 2.7%, according to Ian Pollick, head of North American rates strategy at CIBC.