Fed Chair Powell highlights the positive revisions to NIPA and what it means for the economy
2min read During his remarks at the 66th NABE Annual Meeting, Federal Reserve Chair Jerome Powell offered insights into the current state of the U.S. economy and the direction of Fed policy. One key revelation was the significance of the recent NIPA (National Income and Product Accounts) revisions, which showed that household savings were in better shape than previously thought. The revisions led to an upward adjustment in income, which Powell believes removes a potential downside risk to the economy. This revised data suggests that consumers have more disposable income than originally estimated, signaling continued spending strength and a balanced outlook on savings.
Powell reiterated the Fed’s commitment to adjusting its policy in response to the evolving economic landscape. He emphasized that future rate cuts or moves to a more neutral stance would be determined by economic performance, particularly inflation and labor market data. Notably, Powell highlighted that inflation is on a sustainable path toward the Fed’s 2% target, which has boosted confidence in the Fed's current approach to policy recalibration. The 10-year Treasury yield rose 4 basis points to 3.80% following Powell’s comments, reflecting a reaction to the more optimistic view of household savings and spending.
In discussing labor conditions, Powell noted that the labor market remains solid and "roughly in balance." Despite a cooling in job creation, with hiring slowing to an average of 116,000 jobs per month over the last three months, the Fed chair expressed confidence that further disinflation does not require substantial labor market softening. Powell made it clear that the Fed does not anticipate needing to forecast a significant cooling in employment to meet the 2% inflation goal.
Powell also addressed the broader disinflationary trends in the economy, mentioning that housing services inflation is expected to continue declining as long as the growth rate in rents for new tenants remains low. This is important as housing inflation has been a significant contributor to overall price levels. Additionally, Powell underscored that the Fed is moving cautiously but deliberately, noting that decisions will be made on a meeting-by-meeting basis as more data becomes available, particularly in the context of two upcoming employment reports and an inflation report before the next Fed meeting.
A significant portion of Powell's comments centered around the Fed's long-term policy direction. He reiterated that the goal is to move toward a more neutral stance over time, provided the economy evolves broadly as expected. The neutral rate, which the Fed estimates to be around 3%, is significantly lower than the current policy rate. However, Powell made it clear that any future policy moves would be guided by how the economy performs, especially in terms of inflation and employment.
Lastly, Powell touched on the Fed's second five-year review of its policy framework, signaling that the central bank is taking a fresh look at how it adapts to economic changes. This review will help shape how the Fed responds to future challenges, such as economic shocks or unforeseen disruptions. Powell also commented on the importance of cash in natural disaster scenarios, suggesting that the Fed may have a role to play in ensuring liquidity during such events. Overall, Powell’s speech was a careful balance of optimism about disinflation and labor market stability, coupled with caution regarding the Fed’s next steps, leaving markets to watch incoming data closely.
Equities initially sold off following Powell's remarks, as the combination of his commitment to follow economic data and the encouraging NIPA revision suggested that the Fed was more likely to cut rates by 25 basis points at its next meeting. The comments rattled some weak-handed longs who had been expecting more dovish remarks from the Fed Chair, especially as the market was operating in a relatively quiet session. The sudden jump in yields contributed to the sell-off, but equities quickly bounced back to regain the losses.
Overall, Powell's comments were a relative non-event for the market. The movement in equities was more a result of an overbought condition and the comments arriving during a lull in activity, when liquidity was lighter, making the reaction seem larger than it actually was. While the remarks themselves didn’t shift market sentiment significantly, Powell's mention of the importance of the upcoming jobs reports is notable. The first report, due on Friday, has the potential to introduce volatility as it will be closely watched ahead of the next Fed meeting.