Powell says US inflation battle is not over – 06/22/2023 – Market

Jerome Powell reiterated his defense of the Federal Reserve’s recent decision to forgo an interest rate hike at a key Congressional hearing on Wednesday, but signaled more rigor by saying the battle against inflation is not over.

The Fed chairman told members of the House Financial Services Committee that skipping an interest rate hike last week was “prudent” given “how far and how quickly” the bank has raised its benchmark rate since March 2022. In just over a year, the federal funds rate rose from nearly zero to a range of 5% to 5.25%.

The “full effects of monetary tightening” will take time to sink in, Powell said on the first of two days of semiannual testimony to Congress. He also pointed out that the tightening of credit standards following the collapse of the Silicon Valley Bank (SVB) in March could cause “headwinds” for the world’s largest economy.

His comments come on the heels of the Fed’s latest policy meeting, where policymakers opted to keep rates steady after 10 consecutive hikes in order to better gauge how far the central bank will need to raise borrowing costs to tame inflation. stubbornly high.

Last week, Powell called the move “reasonable” and “common sense” as he was forced to explain the Fed’s decision to halt what has become the most aggressive monetary tightening campaign in decades, at a time when concerns with inflation remain high.

Despite remaining firm at the last meeting, Fed officials signaled, in the most recent “dot chart” of individual projections, their support for two more 25-point rate hikes this year. And Powell hinted at the time that the first of these could take place as early as the next policy meeting in July.

If both increases are implemented, they would eventually raise the funds rate to 5.5% to 5.75%. No reduction is expected until 2024.

Powell said on Wednesday that skipping a rate hike while signaling the need for higher borrowing costs is “completely consistent”.

“The level to which we raise rates is really a separate issue from how fast we move,” he said. “Earlier in the process, speed was very important. Now it’s not so much.” Powell justified the need for more tightening by saying that “inflationary pressures remain high and the process of reducing inflation to 2% still has a long way to go”.

In the latest forecasts, Fed policymakers revised downward their expectations about how quickly core inflation, which excludes food and energy prices, would slow this year. Most expect it to decline to just 3.9% by the end of the year, 0.3 percentage points higher than forecast in March. It has fluctuated around 4.7% in recent months.

He later added that the two rate hikes signaled by the dot chart were “a good guess at what would happen” if the economy performed as expected.

Democratic lawmakers pressed Powell on the economic problems linked to the Fed’s efforts to end inflation, with the committee’s Democratic leader, Maxine Waters of California, saying taking a break was the right decision.

Most Fed officials now expect more robust growth this year than three months ago, according to projections released last week, but the jobless rate is still expected to peak nearly 1 percentage point above its current level of 3.7. %. An increase of this magnitude is normally associated with a recession.

Meanwhile, Republicans focused on possible changes to the Fed’s regulatory apparatus after the recent string of bank failures this year. Patrick McHenry, chairman of the House committee, urged the Fed to stick to its “resolution” on fighting inflation. He also criticized the central bank for supervisory failures that he said contributed to the SVB’s implosion, warning that, at a time of such acute uncertainty about the economic outlook, changes in the Fed’s regulatory approach are “the last thing a well-capitalized banking system needs”.

Powell also said the bank’s rules should be “transparent, consistent and not too volatile”, but acknowledged that the SVB episode suggested the need for stronger supervision and regulation.