The position taken by Federal Reserve Chairman Jerome Powell in his recent statement to the Senate Banking Committee was good news for the U.S. economy and financial markets. For those who remained concerned that the Fed was still inclined to tap the brakes by further tightening interest rates or by hastily reducing its balance sheet, the language from the Federal Open Market Committee's January statement and the chairman's recent testimony was encouraging.
By reiterating that it has decided to pause its rate-hiking behavior for the time being and, by signaling an earlier balance sheet normalization at higher than historic levels, the Fed has taken major steps in a positive direction toward a soft landing for the U.S. economy. Historically, an economic soft landing — in which economic growth slows but a recession is averted or delayed — requires small doses of stimulus. With rates still low, a reduction in quantitative tightening may provide the Fed with just enough of a spark to modulate economic growth. The typical ramifications of such a policy change, such as improved credit spreads, stability in shorter-maturity interest rates, a steepening U.S. yield curve and a weakening U.S. dollar, should create a positive feedback loop that will help stabilize the nation's economic growth rate at a more modest level.