Meet the next Fed boss. Same as the old boss? Jerome Powell to face Senate glare

Wall Street and Main Street will get their first big clue this week on how the next leader of the Federal Reserve plans to safeguard the U.S. economy and set the cost of borrowing for consumers and businesses.

Jerome Powell, nominated by President Trump to be the next chairman, heads to Capitol Hill on Tuesday to take questions from the Senate. Powell is set to take over from outgoing Chairwoman Janet Yellen.

“This is Powell’s chance to prove to the Senate Banking Committee and the markets that he is up to the job,” said Paul Ashworth at Capital Economics.

Fed bosses are never all that forthcoming, keep in mind, so don’t expect Powell to deliver any shockers. He’s likely to stick to a script largely written by Yellen that calls for gradually raising U.S. interest rates but keeping monetary policy loose enough to aid economic growth.

And the next rate increase could be coming soon. Real soon.

Fed bigwigs convene Dec. 12-13 in their last big meeting of 2017 and in what could be Yellen’s swan song. Wall Street widely expects the central bank to raise its benchmark fed funds rate by a quarter-point to 1.25% to 1.5%. Many loans such as mortgages, car loans and business lines of credit are tied to changes in the fed funds rate.

Although the Fed has left open a small possibility that it could stand pat, the odds highly favor an increase in interest rates. A slew of indicators including GDP, employment, home sales and industrial production all point to a U.S. economy that’s as strong as any time in the last decade.

More confirmation could come from the central bank’s own Beige Book, a periodic report that’s basically a Fed checkup on the economy. The report, due the day after Powell’s Senate testimony, is all but certain to affirm the U.S. is still going strong more than eight years into the current expansion.

The only wellspring of anxiety for the Fed is a surprisingly low rate of U.S. inflation.

No matter how long the economy grows and how low unemployment goes — the jobless rate recently fell to a 17-year low of 4.1% — inflation has been unable to consistently reach the Fed’s 2% target.

In candid remarks last week, Yellen fretted that persistently low inflation would leave the Fed with few tools to combat the next recession — what Yellen called a “very dangerous state of affairs.”

The Fed will get one more look at its preferred inflation index, the PCE price gauge, before the central bank’s widely anticipated December meeting. The October PCE comes out Thursday.

The yearly rate of inflation as measured by the PCE stood at 1.6% in September and just 1.3% if the volatile food and energy categories are stripped out.

At their last meeting in early November, senior Fed officials debated at length the sources of low inflation. Some called for a new approach to monetary policy that assumes inflation will remain low and a few even appeared to blame the central bank itself for contributing to the idea that prices are unlikely to rise much.

“The debate on inflation and price-level targeting suggests there is a push to make the Fed more dovish,” said Paul Mortimer-Lee, head of U.S. economics at BNP Paribas.

Just how dovish? Stay tuned.
Source: MarketWatch

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