Like a regular physical with a doctor, in the week ahead the U.S. Senate gets a regular update from the government’s chief banker on America’s health.
On Wednesday Federal Reserve Chairman Jerome Powell is scheduled to testify before the Senate Banking Committee.
This isn’t a special visit. It is one of the two scheduled each year by the Fed head. Every February and July the chairman has to testify to Congress, delivering the agency’s prognosis on the American economy.
U.S. stock market gauges are beating strong, hitting new record highs. The trade fever between America and China is showing early signs of breaking. And the job market remains hearty. Those are signs of a healthy economy, no?
Well, yes, those economic vital signs are decent.
The Fed is a patient agency but one that likes to administer monetary medicine preemptively. That’s why the Fed steadily raised its target interest rate over two years. It’s also why the Fed quickly reversed course and cut its short-term borrowing rate three times last year.
Since then, the central bank’s prescription for the economy has been wait-and-see.
Now, Powell’s diagnosis of the economic risk presented by the spreading coronavirus will be key for investors to understand the Fed patience.
The American consumer isn’t presenting any troubling signs. That’s not what may trouble the Fed. It’s the risk of economic infection from China. If it sees worrying signs, market expectations of a possible rate cut will grow.
After all, when the Fed decided to switch course last year and cut interest rates, it cited “the implications of global developments” as a reason.
Less than two weeks ago, the Fed’s interest rate-setting committee voted to leave rates unchanged. Powell said the Fed was “carefully monitoring the situation” regarding the coronavirus.
Investors will learn Wednesday if he’s sticking with that diagnosis.
