Jay Powell is set to defend the Federal Reserve’s decision to forgo an interest rate rise at its recent policy meeting, but will signal that the battle against inflation is not yet finished, in remarks prepared for a high-stakes congressional appearance on Wednesday.
Powell, chair of the US central bank, will tell lawmakers on the House financial services committee that skipping a rate rise last week was “prudent” given “how far and how fast” the Fed has lifted its benchmark rate since March 2022. In just over a year, the federal funds rate has risen from near-zero to a range of 5 to 5.25 per cent.
The “full effects of monetary restraint” will take time to be realised, Powell will say in opening remarks on the first of two days of semi-annual testimony to Congress. He will also highlight that the tightening in credit standards following the collapse of Silicon Valley Bank in March could cause “headwinds” for the world’s largest economy.
However, Powell will hint that the central bank still has more to do in terms of squeezing the economy in order to get inflation under control.
“Inflation has moderated somewhat since the middle of last year,” he will say. “Nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2 per cent has a long way to go.”
His comments come on the heels of the Fed’s latest policy meeting last week at which officials opted to hold rates steady after 10 consecutive increases in order to better assess how much further the central bank will need to raise borrowing costs in order to tame stubbornly high inflation.
Powell last week billed the move as both “reasonable” and “common sense” as he was forced to defend the Fed’s decision to pause what has become the most aggressive monetary tightening campaign in decades at a time when inflation concerns remain rampant.
Despite staying pat at the latest meeting, Fed officials signalled, in the latest “dot plot” of individual projections, their support for two more quarter-point rate rises this year. And Powell hinted at the time that the first of those could come as early as the next policy gathering in July.
If both increases are implemented, that would ultimately raise the funds rate to 5.5 to 5.75 per cent. No cuts are expected until 2024.
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Democratic lawmakers are set to press Powell on the economic pain associated with the Fed’s efforts to stamp out inflation. Most Fed officials now expect more robust growth this year than three months ago, according to projections released last week, but the unemployment rate is still expected to peak nearly 1 percentage point higher than its current level of 3.7 per cent. An increase of that magnitude is typically associated with a recession.
Republicans, meanwhile, are likely to question Powell about the decision to pause the monetary tightening campaign amid relentless concerns about price pressures.
In the latest forecasts, policymakers at the Fed revised lower their expectations for how quickly “core” inflation, which strips out food and energy prices, will descend this year. Most now expect it to moderate to just 3.9 per cent by the end of the year, 0.3 percentage points more than what was pencilled in March. It has hovered around 4.7 per cent in recent months.
Source: Economy - ft.com
