Jerome Powell Speech: Fed Chair responds to questions before Senate
Federal Reserve Chairman Jerome Powell presents the Monetary Policy Report and responds to questions before the Senate Banking Committee.
Powell told the House Financial Services Committee on Wednesday that incoming data will determine when they will start reducing the policy rate and repeated that they would like to have greater confidence inflation will move sustainably toward 2% before taking action. Commenting on the economic outlook, Powell noted that there was no reason to think the economy was “in or facing a significant near-term risk of recession.”
The benchmark 10-year US Treasury bond yield declined to 4.1% in the American session on Wednesday and the US Dollar (USD) suffered large losses against its major rivals. According to the CME FedWatch Tool, markets are currently pricing in a nearly 90% probability of a rate cut in June.
US Dollar price this week
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the weakest against the Japanese Yen.
| USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
| USD | -0.44% | -0.59% | -0.30% | -0.87% | -1.39% | -0.70% | -0.19% | |
| EUR | 0.44% | -0.15% | 0.14% | -0.43% | -0.94% | -0.28% | 0.26% | |
| GBP | 0.59% | 0.16% | 0.27% | -0.28% | -0.79% | -0.11% | 0.41% | |
| CAD | 0.30% | -0.12% | -0.29% | -0.56% | -1.09% | -0.42% | 0.12% | |
| AUD | 0.87% | 0.43% | 0.28% | 0.57% | -0.50% | 0.15% | 0.67% | |
| JPY | 1.37% | 0.91% | 0.72% | 1.06% | 0.46% | 0.63% | 1.17% | |
| NZD | 0.72% | 0.28% | 0.12% | 0.42% | -0.16% | -0.66% | 0.53% | |
| CHF | 0.19% | -0.25% | -0.41% | -0.12% | -0.69% | -1.21% | -0.52% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
This section below covers highlights from Fed Chairman Powell’s prepared remarks and the Q&A session on the first day of his testimony.
Main takeaways from Powell’s Q&A session in the US House
“Rate cuts will depend on path of the economy.”
“Incoming data will determine when rate cuts begin.”
“We would like to have more confidence on inflation; we have some confidence but want more.”
“Let’s see a little bit more data so we can become confident.”
“Strength of economy and labor market means we can approach that carefully, thoughtfully.”
“Pandemic may have changed in a sustained way how we target inflation.”
“We are seeing continued solid growth, which should continue.”
“No reason to think the economy is in or faces significant near-term risk of recession.”
“I don’t think possibility of recession is elevated right now.”
“So far we have economy growing at solid pace, labor market still tight and strong.”
“Inflation has come down sharply.”
“These are very attractive conditions we want to continue.”
“I think we can achieve a soft landing.”
“We are using our tools to keep a strong labor market and strong growth while making progress on inflation.”
“We are on a good path so far in being able to get there.”
“We are making sure banks with commercial real estate sector exposure can manage any losses.”
“This fallout will last over next several years.”
“Our Fed supervisors are engaged with small and medium-sized banks on their exposure risks.”
“Immigration and labor force participation both contributed to strong economic growth we had last year.”
“Silicon Valley Bank’s failure was due to a too-concentrated funding structure.”
“We are not climate change policymakers.”
“We are starting very carefully with large institutions on their climate exposure; not for imposing it on small banks.”
“Compensation incentives were not a main driver of Silicon Valley Bank’s failure.”
“Climate change is real and poses risks over the longer term.”
Highlights from Powell’s prepared statement
“It will likely be appropriate to begin dialing back policy restraint at some point this year.”
“Policy rate likely at its peak for this cycle.”
“The Economic outlook is uncertain; ongoing progress to 2% inflation is not assured.”
“We will carefully assess incoming data, evolving outlook, balance of risks.”
“Risks to both cutting rates too early and too fast as well as too late or too little.”
“The labor market remains relatively tight.”
“Fed’s restrictive stance is putting downward pressure on economic activity and inflation.”
“Labor demand still exceeds supply; nominal wage growth has been easing.”
“Risks to achieving dual goals moving into better balance.”
“While inflation is still above 2%, it has eased substantially.”
“The economy has made considerable progress over past year on dual mandate.”
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
About Jerome Powell (via Federalreserve.gov)
“Jerome H. Powell first took office as Chair of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term. He was reappointed to the office and sworn in for a second four-year term on May 23, 2022. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System’s principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028.”
Fed FAQs
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.
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.
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.
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.