Powell's Testimony Continues: Inflation Target, Balance Sheet Reduction, Household Debt Concerns

Federal Reserve Chair Jerome Powell completed his second day of testimony in Washington Wednesday related to the Fed’s monetary policy outlook. Powell discussed the Fed’s interest rate target, scaling back the Fed’s balance sheet and U.S. household debt levels.

Inflation Target

According to the U.S. Treasury Inflation Protected Security (TIPS) market, the long-term U.S. inflation rate is expected to be just 1.8 percent. Inflation rates dipped to around 1.5 percent in December after spending most of 2018 at or above the Fed’s target rate of 2 percent.

On Wednesday, Powell said the Fed has not considered raising its target inflation rate.

"We are not looking at a higher inflation target, full stop," Powell said.

He did say the Fed is considering alternative ways to boost inflation.

Balance Sheet Reduction

Powell also said the Fed expects to end its balance sheet reduction “sometime later this year.”

Since October 2017, the Federal Reserve has been selling assets and has reduced its holdings of Treasury bonds and mortgage-backed securities from around $4.2 trillion to $3.8 trillion. During that period of selling, bank reserves have shrunk from $2.8 trillion to $1.6 trillion. Powell said Wednesday the balance sheet reduction will likely concluded when bank reserves approach $1 trillion.

"We're close to agreeing on a plan which would light then way to the end of the process," Powell said Wednesday.

"We actually don't know what the equilibrium demand will be. We're going to have to find it over time. My guess is we'll be announcing something fairly soon."

Household Debt Concerns

U.S. household debt hit a record $13.5 trillion in 2018. Powell isn't particularly worried.

“The overall household picture of debt, if I could start with that, is basically a healthy one,” Powell said.

He said there are “a couple of areas of concern,” with the primary one being student debt.

“There’s a growing body of research that shows that students who borrow for their education and wind up not getting the kind of value they thought they would get, so that their incomes are lower than they expected and can’t pay the debt back, that debt can hang over their economic and personal lives for many years, meaning lower levels of home ownership and other measures of economic success.”

Powell said the Fed is seeing more and more evidence of student debt having a real impact on Americans’ financial decisions.

For the second straight day, investors don’t seem phased by Powell’s testimony. The SPDR S&P 500 ETF Trust SPY was lower by less than 0.1 percent in mid-day trading.

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