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Fed's Quarles Faster Growth to Spark Higher Inflation, Rate Hikes

Fed's Quarles Faster Growth to Spark Higher Inflation, Rate Hikes

By    |   Tuesday, 27 February 2018 08:40 AM

Today has all the chances of becoming a very interesting day.

From one side we’ll have 2 economists, Janet Yellen and Ben Bernanke, that will sit down to talk to one another at the Brookings Institution in Washington, DC, and from the other side we’ll have the new Fed Chair Mr. Powell who will deliver his first testimony before the House Financial Services Committee, of course also in Washington, DC.

So, we’ll have at the Brookings Institution former Fed Chair Bernanke who will interview Dr. Yellen on her career, her time at the Fed, her observations about the current state of the economy and the challenges that confront us. Following their conversation, the two former Fed chairs will take questions from the audience.

The two worked together for many years and are of course highly respected economists. Their views on the state of the U.S. economy will be of particular interest to the financial markets, especially as neither is now constraint by the politics of holding an official position.

From the other side we’ll have the new Fed Chair Jerome Powell, who is not an economist, will be giving his first prepared testimony to the Senate Banking and Finance Committee while he will return to Capitol Hill on Thursday to answer questions from the Senate Banking Committee.

It surely is a coincidence that Powell is speaking on the same day as Bernanke and Yellen.

Powell has yet to preside over his first Federal Open Market Committee (FOMC) meeting that takes place on March 20-21, and that will come with the FOMC’s summary of economic projections and a press conference given by the Chair.

It is likely that Fed Chair Powell will stick today to the tone of the minutes of the recent FOMC meetings.

Besides that, yesterday, the Fed’s Vice Chairman for Supervision Randal Quarles set out in a prepared speech titled “An Assessment of the U.S. Economy” given at the National Association for Business Economics (NABE) Economic Policy Conference in Washington, DC, the case for higher growth and higher interest rates.

His speech reads among other things:

  • “It is fair to ask what a higher growth path might mean … it could mean a higher natural interest rate, which would increase the amount of accommodation provided at a given level of the Federal Reserve's policy interest rate.”
  • “It might seem reasonable to assume that faster growth would lead to firmer inflation … For one, the degree to which growth spurs inflation is likely to be determined by the underlying factors that are prompting the increase in growth. A demand-led increase can be expected to have a greater positive effect on prices than a step-up in the pace of potential growth. Growth led by an increase in the economy's productive capacity, either through increased labor force participation or higher productivity growth, is likely to impart less upward pressure on prices.”

Besides all that, today we’ll also get the important durable-goods orders data on which investors should keep in mind that monthly fluctuations in durable goods orders are frequent and large and skew the underlying trend in the data. In fact, even the yearly change must be viewed carefully because of the volatility in this series.

We’ll also get the important international trade in goods data. Please take note that data in the advance goods report are accounted for on a census basis and can differ slightly from subsequent data in the international trade report where goods data are accounted for on a balance of payment basis to adjust for changes in ownership that can occur without goods passing into or out of the US.

Meanwhile over in Europe, the European Union is doing what it does best, which is leaking documents. Extracts from the draft of the EU-UK divorce proceedings are circulation in the media ahead of formal publication tomorrow, Wednesday. The draft is being taken as a negotiating position.

Meanwhile, the UK opposition Labor leader Jeremy Corbyn has declared support for a “customs union” with the EU, which is the headline while attaching conditions that make it almost impossible that the EU would accept any such customs union with the UK. It’s an issue in that it complicates the government’s position rather than providing a working alternative.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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It is likely that Fed Chair Powell will stick today to the tone of the minutes of the recent FOMC meetings.
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2018-40-27
Tuesday, 27 February 2018 08:40 AM
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