"I think it will probably express the tone of the minutes because he's testifying on behalf of the committee in front of Congress. One of the takeaways from [the minutes] was the sense that the upside risks are increasing but that doesn't mean they're going to increase the pace of rate hikes," said John Briggs, head of strategy at NatWest Markets. "It's really around the pace of hikes. ... Is there a change in pace or an elongation of the current pace?"
UBS economists said in contrast, Powell could include some slightly forward-looking statements in his testimony next week, while the Monetary Policy Report is a backward-looking summary of the economy. They expect him to say during testimony that economic activity is solid; inflation is higher; and longer-run financial sustainability could be worrisome.
"We expect him to implicitly note that fiscal stimulus, if it induces faster activity and higher inflation, could result in a more aggressive pace of rate hikes," said UBS economists in a note. "The FOMC has already been clear on the point that it might have to tighten sooner or more aggressively than it would otherwise if there was substantial fiscal stimulus."
The Fed noted in its January meeting minutes that several Fed officials increased their economic outlooks because of new tax policy.
The policy report Friday could also focus on inflation, and should point to signs of rising inflation, echoing Fed comments that the pace could rise to its target 2 percent. In 2014, the usually uneventful policy report contained a line that biotechs were overvalued, but economists expect no such drama in the first report from Powell.
The report is much more important given the market's reaction to the Fed's minutes, released Wednesday. Often a routine reiteration of a meeting already long past, the January meeting minutes became the catalyst for a dramatic stock market event Wednesday afternoon.
At first, the stock market latched onto the fact the Fed did not describe widespread wage gains or runaway inflation, meaning it may not need to change the pace of its rate hikes. But a more than 300 point Dow rally abruptly reversed as bond yields spiked on the fact the Fed emphasized that it sees scope for further tightening, or rate increases due to a stronger economy.
Thursday's markets were calmer but with a volatile move higher in stocks that peaked during late-morning trading. The Nasdaq was slightly lower in afternoon trading. Treasury yields were lower, with the 10-year at 2.90 percent, off the recent high of 2.597 percent. The 20-year which most reflects Fed policy, was at 2.25 percent.
Some economists, like those at Goldman Sachs, reiterated they were more confident in a four rate hike scenario after the minutes. But others said they are still awaiting the Fed's update on its forecast after the March meeting, where it is expected to raise its fed funds target range by a quarter point in the first hike of the year.
"Right now, we're in a little bit of a lull when it comes to economic numbers," said Daniel Deming, managing director at KKM Financial. He said the market will focus on Powell for clarity. "The minutes are going to dominate the mindset of the market right now. This bounce is pretty impressive considering where we were overnight. At least rates tempered for the time being, and everything is so oversensitive right now. You're seeing short-term momentum players pushing the market around."
In the bond market, traders talked about a large short position in futures that could be holding back rate gains, but many pros are awaiting the next catalyst that will kick off a move in the 10-year to 3 percent, a psychological number that could spook the stock market. Rates move opposite price in the bond market.
Stocks fear higher interest rates because if they get elevated enough they compete for investment dollars and make interest rates higher for businesses and investors. Rising inflation, as a catalyst for rate hikes, would be add even more worries of eroding profit margins and a more aggressive Federal Reserve.
Markets will also be watching Fed speakers Friday at the U.S. Monetary Policy Forum annual conference, though they are not expected to say anything that would steal the thunder from Powell's first appearance.
New York Fed President William Dudley and Boston Fed President Eric Rosengren will discuss the Fed's balance sheet in a 10:15 a.m. ET session, while Kansas City Fed President Esther George and Cleveland Fed President Loretta Mester discuss policy at 1:30 p.m.