Powell’s Congressional Testimony Provides Clues on Interest Rates and Monetary Policy
Fed Chair Jerome Powell: More Work to be Done on Trimming Balance Sheet 💸
Federal Reserve Chair Jerome Powell told lawmakers that the central bank still has a long way to go in reducing its massive balance sheet, which has grown significantly since the pandemic. 💸
“We’ve made quite a lot of progress, but we think we have a good ways to go,” Powell said during his second day of congressional testimony in Washington. 🗣️
The Fed has already reduced its holdings by about $1.7 trillion, but officials expect to shrink the balance sheet substantially more. They want to avoid a repeat of 2019, when a shortage of reserves led to a spike in short-term borrowing costs. 📈
A Delicate Balance
Powell emphasized that the Fed needs to move carefully to prevent its bond holdings from falling too low. “Going a little bit slower might actually enable us to go further,” he said. ⏱️
The Fed chair also reiterated that recent price readings have shown “modest further progress” towards the central bank’s 2% inflation target. He emphasized that more good data would strengthen the case for cutting interest rates. 📊
Bank Rules and Regulations
Powell also discussed the proposed changes to bank capital requirements, which could be a major win for Wall Street banks. He said that regulators are close to agreeing on a revamped plan, which would require big banks to hold significantly more capital to buffer against losses. 🏦
The original proposal would have forced the biggest US lenders to hold as much as 19% more capital, but it seems that regulators are backing down from that plan. Powell said that not all parts of the plan will be republished for comment, and that the conversations between the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency have been “strictly collaborative” and “very productive” thus far. 💼
September Clues
Markets are focused on whether the Fed will provide more clues about a possible rate cut in September. While the labor market has held up under pressure from higher interest rates, an uptick in the unemployment rate has added political pressure on Fed officials to start reducing borrowing costs. 📊
The Fed’s preferred inflation measure rose 2.6% in the 12 months through May, down from 7.1% in June 2022. While unemployment remains low at 4.1%, it has ticked up in each of the last three months. 📊
The Bigger Picture
The Fed’s dual mandate to maintain stable prices and full employment has been a topic of discussion. Powell believes that the current arrangement has served the Fed well and has not prevented it from responding to rising prices. 📈
Some critics of the dual mandate feel that the Fed should only focus on inflation, but Powell disagrees. He thinks that the dual mandate has allowed the Fed to respond to changing economic conditions and has been a good thing for the economy. 📊
Interest Rates and the Economy 📈
Powell’s remarks suggest that the Federal Open Market Committee is unlikely to reduce rates when it meets on July 30-31. The Fed has held its policy rate in a range of 5.25% to 5.5%, a more than two-decade high, for nearly a year. 📊
The Fed chair has avoided giving any strong signals on interest rates, though he has emphasized that policymakers face risks from both moving too quickly or too slowly to take action. ⏱️
The Road Ahead 🚦
As the Fed navigates the complex landscape of monetary policy, one thing is clear: there’s still much work to be done to achieve its goals. The central bank needs to balance the risks of inflation and unemployment, while also ensuring that financial institutions have access to adequate reserves. 💪
Powell’s testimony has provided some clues about the Fed’s future plans, but markets will be watching closely for more signs of what’s to come. Will the Fed cut interest rates in September? Only time will tell. 🕰️
