Federal Reserve Chair Powell: We are very far from our inflation target
- Jerome Powell is delivering his bi-annual testimony in front of congressional lawmakers.
- Fed Chair responds to questions after delivering the Semi-Annual Monetary Policy Report.
- US Dollar, stock markets and all asset classes could be on the move with Powell’s words.
Jerome Powell, Chairman of the Federal Reserve System (Fed), testifies before the House Financial Services Committee. During the hearing, entitled “The Federal Reserve’s Semi-Annual Monetary Policy Report”, congressional lawmakers have the opportunity to direct questions to Chairman Powell on a variety of topics, including financing conditions, inflation outlook and future monetary policy steps.
These are the main takeaways from Powell’s Q&A sessions in the US House:
We are very far from our inflation target
“Our banks are very strongly capitalized.”
“We are very far from our inflation target.”
“We are strongly committed to getting inflation back down to 2% over time.”
“We learned from Silicon Valley that there is a need for stronger supervision, regulation for banks of that size.”
“There are situations in which we need to be more forceful, not in all situations though.”
May make sense to move rates higher, at more moderate pace
“Level for rates and speed of rate hikes are separate.”
“Early in process, speed was important, less so now.”
“It may make sense to move rates higher, at a more moderate pace.”
“We are moderating the pace, much as you might decelerate a car as near destination.”
“Regulation should be transparent, consistent, not too volatile.”
“Capital is central to banking regulation.”
The section below was published at 12:40 GMT, before Federal Reserve Chairman Jerome Powell’s testimony in US Congress.
Jerome Powell‘s prepared testimony for delivery to the House Financial Services Committee, published ahead of the event, showed that the Fed Chairman will repeat that nearly all FOMC participants expect it will be appropriate to raise interest rates “somewhat further” by the end of the year.
“My colleagues and I understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2% goal,” Powell will tell the House committee. “Inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go.”
Regarding the policy outlook, Powell is set to reiterate that they will continue to make policy decisions on a meeting by meeting basis, based on incoming data, implications for the outlook and the balance of risks.
In the semi-annual Federal Reserve Monetary Policy Report released on Friday, the Fed acknowledged that the outlook for fed funds rate is subject to considerable uncertainty, while reiterating that inflation in core services ex-housing has not shown any signs of easing. Although the Fed left its policy rate unchanged at the range of 5-5.25% following the June policy meeting as expected, the hawkish revision to the terminal projection rate in the Summary of Economic Projections suggested that policymakers see the need to for additional tightening later this year. According to the CME Group FedWatch Tool, markets are pricing in a stronger than 70% probability of a 25 bps hike in July.
Members of House will question Powell about the policy outlook and its potential impact on the economy. The banking crisis in March unveiled the negative impact of high interest rates on financing conditions and heightened fears over an economic slowdown. Uncomfortably high inflation and the strong labor market, however, should allow the US central bank to stay focused on reinstating price stability.
Fed FAQs
What does the Federal Reserve do, how does it impact the US Dollar?
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
How often does the Fed hold monetary policy meetings?
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
What is Quantitative Easing (QE) and how does it impact USD?
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
What is Quantitative Tightening (QT) and how does it impact the US Dollar?
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.