Highlights of the Jerome Powell FED Testimony

On the night of 11th January, Jerome Powell testified before the Senate making a pre-drafted statement and also taking questions from the members present. He answered questions on inflation, the pace of the rate hikes, timing of the rate hikes, timing of the stimulus and unwinding the $9 trillion balance sheet of the FED. 

Powell testimony sets the tone for rapid hawkishness

Here is what Powell communicated in his testimony.

1) Powell has said in no uncertain terms that the stimulus era was over. People should not expect anymore stimulus, virtually ruling out any big monetary looseness even if there was going to be an extended Omicron risk. 

2) Powell underlined that the goal of the stimulus was to ensure that Americans maintain their basic purchase standards to avoid popular unrest or compression in demand. That goal had been achieved and did not need any further support.

3) Powell spoke at length on how inflation was becoming increasingly sticky. He has also dropped the usage of the word transitory to describe rising inflation. Inflation was 6.2% last month and is expected to spike to 7.1% in December 2021; a 40 year peak.

4) The testimony highlighted that the FED was concerned about the impact of sticky inflation on the US job market. He felt that continued high levels of inflation could undermine the full employment at 3.9%, just achieved by the government. 

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5) The testimony did not comment on the rising commodity prices, just saying that the privately negotiated prices or market determined prices were outside the purview of FED oversight. 

6) In an important shift in stance, Powell highlighted that the rate hikes could be steeper, faster and more aggressive i.e. supported by other tools. FED has now pencilled 4 rate hikes against 3 rates in 2022. Also, the timing could be front-ended with the first rate hike of 2022 starting off in Mar-22 itself. 

7) The Powell testimony also underlined the need to wind down the existing bond book of the FED worth $9 trillion. According to the testimony, the taper will be completed in Mar-22 and the winding down of the $9 trillion balance sheet will also start immediately after that.

So by March, there would be taper completed, rates hiked and liquidity tightened further by winding down the bond balance sheet of the FED.

In short, there are a lot of big shifts visible in the Powell testimony. Inflation is the biggest concern, stimulus is over, rate hikes will be front-ended and the FED balance sheet will be gradually unwound. Year 2022 will be a case of tighter liquidity and higher cost of funds.