When Jerome Powell testifies to Congress on Tuesday in his first public appearance as chairman of the Federal Reserve, investors will be paying close attention to his every word.
Financial markets are always on high alert for any hints of policy shifts when the leader of the world's most powerful central bank speaks publicly. But in this case, they will be listening with particular care. It will be the first time they will hear Powell articulate his views since he succeeded Janet Yellen.
Most of all, investors will be parsing Powell's words for any signal of when or how quickly the Fed will continue to raise interest rates. The Fed had forecast in December that it would raise rates three times in 2018. But many analysts think economic developments might lead it to accelerate that pace.
Powell will be offering his thoughts on the Fed's twice-a-year monetary report to Congress, which lays out its thinking on the economy and interest rates. He will testify Tuesday to the House Financial Services Committee and on Thursday to the Senate Banking Committee.
Here are five things to listen for:
The financial markets threw a rotten welcoming party for Powell. On Feb. 5, his very first day as Fed chairman, the Dow Jones industrial average plunged by 1,100 points—and fell further in subsequent days. After that wild start to the month, the markets have since stabilized and regained much of the lost ground that had put stocks into correction territory.
Powell is sure to face questions about just what the market turbulence means and whether he worries that the volatility will harm the economy. Does Wall Street's long bull market—and the surge in stocks that followed the 2016 election—leave him worried that share prices have formed a dangerous asset bubble that could pop with disastrous consequences?
If Powell does think so, the Fed might be prepared to accelerate its rate hikes this year to try to further deflate stock prices. On the other hand, the Fed might feel that the stock market plunge at the start of February has already served as a prudent warning to investors that will ease pressure to quicken its pace of rate hikes.
The minutes of the Fed's most recent meeting in January showed that many of the policymakers were upgrading their forecasts for economic growth based on a brightening global picture and the prospect that the Republicans' tax cuts could quicken growth.
Stronger growth would follow years in which the recovery from the Great Recession has plodded along with expansion of only around 2 percent annually—the slowest recovery since World War II. But some economists say the subpar pace of growth has actually contributed to the recovery's durability. It is now the third-longest economic expansion on records dating to the 1850s.
Powell will likely be asked about how the Fed might respond to a pickup in growth at a time when unemployment is at a 17-year low of 4.1 percent and the Fed is gradually raising rates to ensure that inflation doesn't pose a problem. Will the Powell-led Fed be pleased with stronger growth? Or might it feel compelled to accelerate its rate hikes to prevent faster growth from igniting inflation later on?
James Bullard, president of the Fed's St. Louis regional bank, said Monday, "I have been a little bit concerned if the (Fed) goes too far, too fast." Bullard suggested that the Fed needs to avoid becoming overly aggressive with rate hikes if not warranted by the latest economic data.
A key factor triggering the market turbulence earlier this month was a surprise report that average wages rose in January compared with a year ago at the fastest pace in eight years. Some other barometers of inflation have also shown increases. Still, the Fed's preferred measure of inflation remains stubbornly below its target of 2 percent annually.
Investors will want to know whether Powell is becoming convinced that the Fed is finally on the verge of achieving its 2 percent inflation target—and, if so, whether it might soon feel the need to speed up its rate increases. With the current 4.1 percent unemployment rate well below the Fed's own 4.6 percent designation for full employment, how much of an acceleration in inflation might the central bank tolerate before deciding to step up its rate hikes?
When President Donald Trump proposed a budget two weeks ago, it forecast a dramatic jump in deficits over the next decade compared with his first budget last year. The new budget expects deficits will total $7.1 trillion over the next decade, more than double the deficits the administration projected last year.
Much of the increase will come from the $1.5 trillion tax cut Trump pushed through Congress in December. And critics contend that even the expected sizable jump in deficits understates the amount of red ink that will likely flow. That's because the administration's budget didn't include the $300 billion in increased spending that was included in a government funding deal Congress passed right before Trump released his budget.
What's more, Trump's new budget is counting on growth to accelerate from the 2 percent pace seen since the recovery began to rates of 3 percent or better. The Fed has a far dimmer view: More in line with most economists, the Fed projects the long-run growth rate at around 1.8 percent.
Powell will likely be quizzed about this discrepancy and about whether the Fed worried about potential economic overheating and inflation from the increased government stimulus.
At his Senate confirmation hearing, Powell indicated support for the tougher bank regulations in the 2010 Dodd-Frank Act, which was enacted after the 2008 financial crisis. But he also said he could see areas where the regulations could be eased, especially for community banks.
Powell's stance didn't go as far as Trump's position. Trump has called Dodd-Frank a disaster that should be scrapped because of the harm he said it was doing to the economy by making it harder for banks to make loans. Lawmakers will likely press the new Fed chairman on the issue of bank regulations, given that both the House and the Senate have put forth bills that would overhaul Dodd-Frank.
That effort could be bolstered by support from Powell and other Trump nominees to the Fed. The central bank has four vacancies on its seven-member board that Trump will be able to fill.