Democrats/Republics Lay Their Markers

The chess match between and Democrats and Republicans on financial committees continued as The Fed Chair visited the House of Representatives. Fed Chair Jerome Powell was in front of the House Financial Services Committee for the second half of his two-day appearance on Capitol Hill for his bi-annual report.

Jerome Powel
Jerome Powel

He testified in front of the Senate Banking Committee on February 26, 2019: in a hearing also covered by The Industry Spread.

If opening speeches are any indicator, Democrats plan to use their time to claim the Trump economy benefits the wealthy – particularly big banks – which are being allowed to act recklessly.

Meanwhile, Republicans will play up an economy that has a good growth (gross domestic product growth may hit 3% for the first time in more than a decade), low unemployment, and with wages and labor force participation both increasing.

They credit this to the Trump tax cuts passed in 2018 and a general atmosphere of reducing regulations.

During the Senate hearing, Sherrod Brown, a Democrat from the State of Ohio, said, “It’s been a great week for Wall Street…“It (Wall Street) continues to demand weaker rules, so big banks can take bigger and more dangerous risks.”

While the Senate remains in Republican hands, the House flipped to the Democrats last month.

The Chair of the House Financial Services Committee is Maxine Waters, a Democrat from the State of California; Waters is one of the most liberal house members. She noted during her opening statement, “I’m concerned about some of the actions of President Trump and  in his administration and perhaps you will be asked today about whether or not- it is affecting the feds decisions.”She then blamed Trump for the longest government shutdown, a trade war, and his “tax scam”- which she called “a giveaway to the wealthy and corporate America”.She suggested this economic policy led to the Fed pausing their rate increases indefinitely.

Maxine Waters
Maxine Waters

“The last matter I want to raise pertains to the Federal Reserve’s apparent efforts to modify Dodd/Frank safeguards Congress and your predecessors at the Fed put in place following the financial crisis. In particular, I’m concerned that the Fed is following some of the Trump Treasury Department’s regulatory roadmap to weaken the capital and liquidity buffers on some of the largest banks.” Waters said in her opening statement.

Meanwhile, Republicans have also repeated similar talking points. Senator Mike Crapo is a Republican from the State of Idaho and the Chair of the Senate Banking Committee.In his opening statement, he noted healthy GDP growth, low unemployment, increasing wages and labor force participation rate.

The ranking member of the House Financial Services Committee is Patrick McHenry, a Republican from the State of North Carolina. During his opening statement, he said, “The economy over the last two and a half years has witnessed remarkable growth. Unemployment has reached lows that many once believed were impossible. Republican led efforts for tax relief and regulatory reform have supported these trends.”

Powell painted a multi-layered picture of the economy. Growth, unemployment, and inflation were all great, but the economy is tapering with numerous potential pitfalls ahead.

Here is the full written report  which was submitted in conjunction with his appearance.

Highlights from his opening statement on the state of the economy are below.

“The economy grew at a strong pace on balance last year and employment and inflation remain close to the Federal Reserve’s statutory goals.” Powell said. Powell estimated GDP for “a little less than 3%“ in 2018, following a growth of 2.5% in 2017. The last quarter from 2018 GDP has not yet been calculated. He called the economic effect from the shutdown minimal, while saying “the job market remains strong.” Monthly job gains averaged 223,000, the unemployment rate stood at 4%, while job openings “remained abundant.” The labor force participation rate “has continued to increase over the past year.” He said. The core inflation rate growth “is estimated at 1.9%” Powell said.

The Fed makes a 2% inflation growth rate the goal.“Financial markets have become more volatile toward year end. Financial conditions are now less supportive of growth than they were earlier last year.” Powell said. Brexit and ongoing trade negotiations add to the uncertainty, Powell said. “it is widely agreed that federal government debt is on an unsustainable path.” Powell said.

The current US debt, financed by US Treasury Bonds, recently eclipsed a mind-blowing $22 trillion.

There are US Treasury Bonds which can be traded with maturities as short as three months and as long as thirty years. There are also a variety of US Treasury derivatives, like this 30 Year-Treasury future from the CME.