Kansas City Fed President Esther George “Threading the Needle” that the US economy is in “excellent” shape and “appears to be firing on all cylinders”. Her baseline outlook is for the expansion to “continue at a moderate pace”. And monetary policy “will need to move from an accommodative stance to a more neutral stance”. But future policy actions will “increasingly need to be data dependent.”

But there is “considerable uncertainty” on where the “neutral policy rate” is. “Various structure changes” suggested the neutral rate is “lower” than in the past. But “cyclical factors” could have partially offsetting that while “fiscal stimulus” is like raising the neutral rate. Likewise, the natural rate of unemployment is uncertain too and “monetary policy is currently testing the limits of how low unemployment can go without causing an undesirable increase in inflation.”

Risks to the outlook “appear balanced” but George emphasized that both upside and downside risks are “significant”. The “predominant upside risks” are “pro-cyclical U.S. fiscal policy and globally accommodative monetary policies.” The government’s tax cuts and increased spending during a “business cycle expansion … may have the short-run benefit of promoting spending and, perhaps, increasing the economy’s longer-run growth potential”. But, “they also carry a risk of pushing the economy beyond its productive capacity.”

The “predominant downside risks come from uncertainty around trade policy.” She hasn’t incorporate any significant effect into her outlook yet. But anecdotal reports from our business contacts suggest that some companies are taking a “wait and see” approach to new capital spending due to uncertainty about future trade policies.” And, “whether this will materially slow the economy over the next couple of years or threaten the sustainability of the expansion is something that I will be monitoring carefully.

Full speech here.

Fed Chair Jerome Powell’s Q&A in the Congressional Testimony was composed and balanced, while being upbeat as expected. Regarding the “hot” topic of flattening yield curve and recession, he didn’t reply directly. Instead, he acknowledged the there are a lot of discussions. But what matters is the yield at the long end as an indication of the so called neutral rate. Right now, 30 year yield is at around 2.96 after hitting as high as 3.247 earlier this year. 10 year yield is at around 2.85 after hitting as high as 3.115. So, 2.75-3.00% is probably the neutral rate to Powell, rather than 2.50-2.75%.

Regarding US trade policy, Powell didn’t comment directly as expected too. It should be reminded that Powell has already made his stance clear before. He doesn’t comment on policies he doesn’t make. And to guard the line of independence of Fed, he has to refrain from commenting on the administration’s policies too. Instead, he takes them as given.

Though, he was willing to talk about trade from “principles” perspective. And to him, countries that embraced free trade and low tariffs used to have better results and higher productivity. Countries that have been more protectionist “have done worse”.