Week ahead: New Fed chief heads before Congress

Federal Reserve Chairman Jerome Powell will testify before Congress on Tuesday for the first time since taking over at the central bank.

Powell will appear before the House Financial Services Committee to review the Fed’s first monetary policy report of 2018. It will be his first congressional testimony after being sworn in as the new Fed chief earlier this month.

Powell’s appearance comes as Fed observers try to predict how the bank will act on interest rates this year. The Fed has forecasted three rates hikes in 2018, the first of which likely occurring next month.

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The U.S. is near full employment and the tight labor market is finally starting to drive up wage growth and prices. The Fed is aiming to raise rates quickly enough to prevent the economy from overheating without short-circuiting the financial markets.

Minutes from the Fed’s Jan. 30-31 meeting released Wednesday showed that the bank expects the economy to grow well enough to support its forecast of three rate hikes in 2018. Fed officials cited the unexpected size of increases in wage growth and stimulus from the GOP tax cut law.

But investors fear that low unemployment, increasing price growth and rising wages will spur the Fed to raise interest rates, which would boost the cost of borrowing money, more than three times.

U.S. stocks tanked for two weeks over January and February with the Dow Jones industrial average and S&P 500 losing 10 and 12 percent of their value, respectively. The Nasdaq lost just under 10 percent in that stretch, just short of a formal correction.

Inflation has moved closer to the Fed’s target, with the Consumer Price Index showing a 2.1 percent increase over the past year. While some Fed officials are skeptical that inflation will return to the ideal range soon, most are ready to move ahead with rate hikes.

Randal Quarles, the Fed’s vice chairman of supervision, said Thursday that the central bank should move ahead with projected interest rate hikes even if inflation lags below target levels.

“The current shortfall in inflation from target [is] most likely due to transitory factors that will fade through 2018, pushing inflation back up to target,” Quarles said Thursday in Tokyo. “Suffice to say, a deviation from our target of a few tenths of 1 percentage point, especially one I expect to fade, does not cause me great concern.”

The Fed considers a 2-percent annual increase in the personal consumption price index to be the ideal level of inflation to maintain a steadily growing economy.

Republicans have long called on the Fed to raise rates, insisting the persistently low levels sustained by former Fed Chairwoman Janet Yellen artificially inflated the stock market and risked rampant inflation. Democrats had been more deferential to the Fed’s judgment under Yellen.

Powell is considered more conservative than Yellen and likely to follow the path laid out by the Fed under her watch. Lawmakers will press Powell on what the Fed expects this year, along with how the bank will work to loosen Dodd-Frank Act rules on banks.

Powell will also be the first Fed official to appear before Congress since the bank slapped Wells Fargo with an unprecedented restriction on its growth. The Fed is also seeking the removal of four Wells Fargo board members after Republican lawmakers had warned Yellen against taking undue action against any bank.

Speaking of Yellen, the former Fed chair on Tuesday will make her first public remarks since leaving the bank. Yellen will be interviewed by her predecessor, Ben Bernanke, at the Brookings Institute, the think tank where both former Fed chairs are fellows.

Also on Tuesday, the Federal Deposit Insurance Corporation (FDIC) will announce banking industry earnings for the fourth quarter of 2017.

Other key economic events initially scheduled for the coming week were postponed after congressional leaders announced that the late evangelist Billy Graham will lie in honor in the Capitol Rotunda next Wednesday and Thursday.

The Joint Economic Committee hearing on the White House economic report, and House Financial Services Committee hearings on the securities law enforcement and foreign investment were postponed.

Your week ahead:

Tuesday:

• Federal Reserve Chairman Jerome Powell testifies before the House Financial Services Committee, 10 a.m.
• The Federal Deposit Insurance Corporation announces fourth quarter 2017 bank earnings, 10:30 a.m.
• Former Federal Reserve chairs Ben Bernanke and Janet Yellen speak at the Brookings Institute, 2 p.m

Recap the week with Overnight Finance:

Tuesday: NAFTA defenders dig in | Tech pushes Treasury to fight EU on taxes | AT&T faces setback in merger trial | Dems make new case against Trump tax law | Trump fuels fight over gas tax

Wednesday: Treasury seeks changes to Dodd-Frank plan on failing banks | WH predicts 3 percent growth through 2020 | Fed sees inflation, rate hikes ahead | Fraud charges for former bitcoin exchange | Justices narrow whistleblower protections

Thursday: New Mueller charges against Manafort, Gates | Fed official says bank should hike rates despite lagging inflation | FBI warns of tax season phishing schemes

Today’s stories:

• Trump announces new North Korea sanctions, by Rebecca Kheel
• Ryan, Pelosi name members to new budget and pension committees, by Naomi Jagoda
• Mnuchin: Companies that work with North Korea won’t be able to do business with US, by Rebecca Kheel
• Wall Street could be changing tune on guns, by John Bowden
   

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