Powell Maintains Dovish Tone in Senate Testimony

Feb 27, 2019
Image of Jerome Powell

Fed Chair Jerome Powell finished his first day of testimony on Capitol Hill basically reiterating the recent Fed Speak of patience in regards to future monetary policy. His two-hour testimony before the Senate Banking Committee reiterated that with inflation at or near the 2% target, and with growth expected to slow some from last year’s levels the Fed has the time and conditions to let the economy run without the threat of rate hikes for the foreseeable future.  When asked what was his primary concern he mentioned the global headwinds of slowing economies in China and Europe, combined with possible disruptions from Brexit which could create turbulence in the U.S. economy.  Domestically, his outlook remains positive with wage gains increasing but not to an extent that he fears inflation gathering momentum. He mentioned hearing from business contacts (Fed Beige Book) that the uncertainty around the trade/tariff issue has kept business investment more in check than would otherwise be the case, but he didn’t venture into commenting specifically on the White House’s approach to trade negotiations.  In the end, the testimony shed little new light but rather reinforced the theme from the post-December Fed  that they have the luxury– with moderate growth and inflation- to be patient with rates and watch how the economy evolves. He’ll reprise his testimony in the House today and while that venue is usually the more entertaining we doubt any new ground will be broken in regards to policy clues. Given the “no surprises” Senate testimony the fed funds futures market didn’t change much with the highest probability a 20% chance for a rate cut by year-end.



newspaper icon  Economic News


In an example of the more things change the more they stay the same the December S&P CoreLogic CS 20-City Home Price Index posted some interesting numbers yesterday. The index reported year-over-year home price appreciation of 4.18%, below the 4.50% expectation and below the November print of 4.58%.  While the slow downtrend in YoY price appreciation has been an ongoing trend (the index posted a high of 6.74% YoY in March 2018), what was interesting in the latest report were the cities leading in YoY price appreciation.  For the twelve months ended December, Las Vegas (11.39%), Phoenix (7.97%), and Atlanta (5.93%) led the 20-city index in annual price gains. Students of the financial crisis will recall those same cities (along with others) figured prominently in the run-up and subsequent cratering of home price values. 


This is not to say we are headed for another crash in the same places but it is interesting that if history doesn’t repeat itself it can certainly rhyme on occasion. To be sure, we are not close to the credit excesses from a decade ago. Further, lending standards remain generally strong, delinquencies still posting historically, or near historically, low rates, and the banking industry is brimming with liquidity and capital it didn’t have a decade ago. That being said, human behavior and preferences being what they are, after a decade of digging out of very deep holes, those sun and sand cities appear appealing once again. Imagine that. 


There was another housing report yesterday that continued a recent trend of softening activity. December housing starts disappointed with 1.078 million units annualized versus 1.256 million expected. The decline was both in single-family homes (-6.7% vs. –5.9%) and multi-family (-20.4% vs. 16.2%). Month-to-month volatility in the multi-family segment is to be expected as these projects tend to be small in number but large in size. More concerning is that single-family starts trended lower for a fourth straight month. 


Offering a silver-lining  in the clouds of recent housing reports, building permits did post a small increase in December and that may bode well for housing starts in the next few months. Also offering a positive for future activity is that the slowing in annual price appreciation, combined with a 50bps drop in mortgage rates since early November, and increasing wage gains are working to improve housing affordability. Thus, while housing activity was losing momentum into late 2018 and early 2019, the seeds for a rebound, particularly during the seasonally strong spring season, are evident. 


Adding to that positive mix, the Conference Board’s consumer confidence reading for February rebounded strongly after dropping in  January following the equity market selling and volatility at year-end.  In fact, the present conditions measure hit an 18-year high while consumer expectations posted the largest monthly gain since 2011. Thus, the angst and uncertainty around year-end seems to have reversed. A relentless two-month stock rally will do that. The rebound in confidence should bode well for the economy  as a whole, and for the housing market specifically. 


While the Fed has made patience and data dependence its touchstone for guiding monetary policy, if housing activity does rebound the Fed is likely to shift to a less dovish stance. In Powell’s testimony to the Senate Banking Committee he reiterated the Fed could afford to be patient regarding rate hikes, but we characterized the January FOMC minutes as having a slight hawkish bias. So certainly improvement in housing activity, and consumer consumption as a whole, not to mention improvements in some of the aforementioned global headwinds, could be enough to move the Fed back into hiking mode. That scenario, however, is likely a second-half 2019 story, at the earliest.




chart icon  Consumer Confidence Present Conditions at 18-Year High


Going against our preternaturally pessimistic instincts, we went looking for things that might indicate a rebound in the economy is in the offing rather than our usual inclination to look for canaries-in-the-coal mine. With yesterday’s consumer confidence numbers the present conditions index hit an 18-year high which caught our eye. At first blush that seems to bode well for consumer spending.  And while that could be the case, we couldn’t help but also notice the current uninterrupted  ten-year run and the fact the  prior18-year high was followed rather abruptly by a dip and recession. So, does this graph point to continued upside or possible trouble ahead?


consumer confidence chart



graph icon Agency Indications — FNMA / FHLMC Callable Rates


Agency Indications — FNMA / FHLMC Callable Rates



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