Fed Chair Jerome Powell Sticks to Dovish Script During Congressional Testimony

Federal Reserve Chairman Jerome Powell testified before Congress on Tuesday and continued to peddle the “transitory” inflation narrative.

Keeping with the dovish tone set after last week’s FOMC meeting, Powell reiterated that the central bank is not going to rush to raise interest rates, and he said the Fed would not hike rates merely in response to inflation worries.

We will not raise interest rates preemptively because we fear the possible onset of inflation. We will wait for evidence of actual inflation or other imbalances.”

One has to wonder what exactly Powell considers “actual” inflation. CPI has come in hotter than expected every month this year. If you add up the inflation increases through the first five months of 2021, it comes to 2.7%. If you annualized the number through the end of the year, the inflation rate will be around 6.5%.

Just last September, the Fed was projecting an inflation rate of 1.7%  in 2021. It has now upped that to 3.4%.

Powell did concede that prices are rising faster than expected, but he maintained that it’s nothing to be concerned about.

I will say that these effects have been larger than we expected, and they may turn out to be more persistent than we have expected. But the incoming data are very consistent with the view that these are factors that will wane over time, and inflation will then move down toward our goals and we’ll be monitoring that carefully.”

Powell clearly wants everybody to know that monetary policy tightening is something for the distant future. He emphasized that these price increases “don’t speak to a broadly tight economy.” He said rising prices primarily come from categories “directly affected by reopening” of the economy.

Powell also said the central bank was committed to a “broad and inclusive” job market recovery. He said the Fed was not only looking at headline unemployment numbers, emphasizing, “We will look at all kinds of measures.”

This gives the Fed another out to keep loose monetary policy in place even if the headline unemployment numbers rapidly improve.

It’s clear that Powell doesn’t want anybody to think the Fed might raise rates or cut back on its bond-buying programs in the near future. This is because Powell knows the Fed can’t tighten monetary policy.

The Fed is pretending that inflation is transitory because they really have no ability to control it because it’s the Fed that’s creating it. … That’s where all the stimulus money is coming from. The reason the economy looks like it’s growing is because the government has created inflation, which creates the illusion of economic growth. But the reality is the economy is not growing.”

And if the Fed were to turn off the monetary spigot, the illusion of economic recovery would vanish like a mist.

Despite Powell’s dovish tone, the markets have been quick to believe the Fed will ultimately step up and fight inflation. Even with Powell doing all he could to sound dovish after the June FOMC meeting, gold sold off as if the Fed were about to tighten monetary policy. And when St. Louis Fed President Jim Bullard indicated that the Fed might raise rates in 2022, the markets reacted again. Gold continued to fall, the dollar strengthened, and stocks tanked.

But when you boil it all down, it doesn’t really matter what the central bankers say they might do in the future. The question is what are they actually doing today? The fact that the Fed isn’t raising rates right now given everything that we’re seeing tells you everything you need to know.

It doesn’t matter what the Fed is saying. What matters is what they’re doing. And what they’re doing right now is nothing. They’re ignoring all of these signs of inflation. They’ve got the pedal to the metal when it comes to monetary policy. They’re talking about tapping on the brakes, but they’re not giving any sign that they’re actually going to brake.”

And if you just listen, that’s exactly what Powell is telling you.