Fed Chair Powell: Are You a Hawk in Doves Clothing?
I have my eye on you, Jay Powell.

When you were appointed Chair of the U.S. Federal Reserve (Fed) and leader of the Federal Open Market Committee (FOMC), I was doing cartwheels in my office. The reason was that, from a markets perspective, you were a much better choice than some of the other trial balloons being floated at the time…especially a rules-based hawk like Stanford economist John Taylor.

Of course, I was not alone in my enthusiasm. The markets breathed a sigh of relief and continued to rally on. We were in the middle of synchronized global growth and the fact that the Fed was likely to remain on a gradual tightening path was good enough. Markets seemed to be making new highs every day.

But then things changed in Washington. For a purportedly deficit-hawk party, Republicans in Congress even surprised their fellow Republicans by passing a deficit-financed budget deal on top of a deficit-financed tax-cut deal. All of this was happening as the world and the United States were going through “Peak Growth.”

Knowing what I knew of you, I expected that while you and your colleagues at the FOMC would certainly be concerned about the impact of the fiscal stimulus on growth and inflation, in light of the structural headwinds, you would still remain gradual in your approach to raising interest rates. Clearly, the talkers in your group – folks like St. Louis Fed President James Bullard and Minneapolis Fed President Neel Kashkari – reinforced that thinking.

Then I heard your Humphrey-Hawkins testimony before the House Financial Services Committee on February 27.

Concerns About the Pace of Interest-Rate Hikes

I have to say, I am somewhat concerned, Jay. Are you an interest-rate hawk in dove’s clothing?

When you talk about the need to balance between an overheated economy and the need to raise inflation to 2%, without paying homage to the other Fed mandate of maintaining maximum employment, you have me worried, Jay.

It seems you are getting preoccupied with the economy without worrying too much about the reasons why the previous Fed regime was trying to keep tightening gradual to begin with, which of course was unlikely to change in the near to medium term.

Is that true?

If so, then you may be in the gradual camp today but may not be down the road if growth and inflation show a short-term spurt. That is, you are reeallly worried about inflationary pressures and falling behind the curve. And as a result, your reaction function, whatever that means, is much quicker than, I am afraid to say, the markets were calculating.

Further, I am assuming your Congressional testimony represents the views of the entire FOMC, which, in my view, is even worse than just being the views of Jay Powell the individual.

I hope I am wrong and am overreacting, and that the thinking of FOMC members has not changed meaningfully. I further hope you will walk back some of this later in other speaking opportunities.

Of course, you will never tell me. So, how would I really know?

Well, I am thankful that you and your colleagues provide us market participants some clues. Specifically, if the dot plots in the next Summary of Economic projections change, it will be a dead giveaway that you are more hawkish than we initially thought. It is not the 2018 dots that I will focus on, which of course could move to four from three projected 25-basis-point rate hikes. Instead, I will focus on the 2019 dots. If they move up meaningfully, it will tell me you and your merry band are really concerned about rising inflation.

I have my eye on you, Jay Powell.