Federal Reserve Chairman Powell during a hearing of the House Financial Services Committee in Washington, DC, on June 21, 2023.
Nathan Howard | Bloomberg | Getty Images
Federal Reserve Chairman Jerome Powell will head to Capitol Hill on Wednesday as markets look to get a clearer picture of how the Fed plans to implement monetary policy this year.
The dynamics between financial markets and the Federal Reserve have changed over the past few months regarding the pace and timing of expected rate cuts this year. Markets have had to adjust their collective view from a highly accommodative central bank to a more cautious and thoughtful central bank.
Powell, who will give congressionally mandated testimony in the House of Representatives on Wednesday and the Senate on Thursday, will be tasked with providing a clearer view without causing trouble for a nervous Wall Street.
“The question for the market now is gathering information on when the Fed will start cutting rates and how much,” said Quincy Krosby, chief global strategist at LPL Financial. “He won’t necessarily answer that question. But if there’s any change, any nuance, , that’s what the market wants to see.”
A central question for how the Fed will act going forward is its view on inflation and how Powell expresses that view. In recent weeks, he and others have expressed satisfaction with price trends while expressing concern that risks still lurk, saying it was too early to ease monetary policy.
According to futures market pricing measured by CME Group, the market currently expects the Federal Reserve to start cutting interest rates in June, totaling 4 percentage points this year. Policymakers signaled three cuts in December, but most avoided providing a timetable.
Mixed signals complicate information
On the issue of inflation, the data is mostly consistent.
Inflation data for the second half of 2023 show a clear trend towards the Federal Reserve’s 2% target. However, January brought a jolt, showing that consumer prices, particularly housing costs, Continues higher and threatens the trend.
Powell must carefully synthesize recent trends when he addresses first the House Financial Services Committee on Wednesday and then the Senate Banking Committee the next day.
“The message will largely be ‘mission accomplished’ but ‘we’ve made a lot of progress and we expect a rate cut to be coming,'” said Joseph LaVorgna, chief economist at SMBC Nikko Securities. “To me For me, that’s the central message.”
Powell’s testimony to Congress comes at a tricky moment for markets: After breaking above all-time highs, the major indexes have suddenly turned uncertain this week on continued concerns about the direction of interest rates and the outlook for some of the big tech companies that have been pushing. Sold off. The price is higher.
Both scenarios worry policymakers. A sharp rise in risk asset prices could reflect loose financial conditions, which could lead to tightening by the Federal Reserve, while a less certain environment could raise concerns about interest rates remaining too high for an extended period.
Steven Ricchiuto, chief U.S. economist at Mizuho Securities, wrote that Powell “cannot deviate at all from the committee’s promised ‘data-dependent, but we do want to cut rates’ approach.” He said “Sharp swings in financial conditions could easily defeat the committee’s goal of maintaining tight labor market conditions while keeping inflation expectations and long-term interest rates stable,” he said, referring to the policy-setting Federal Open Market Committee.
political concerns
Powell faces other developments as well. Several economists, including Lavornia, believe that labor conditions are deteriorating despite the apparent unemployment rate of 3.7%. also, The recent alarming rise in cryptocurrency prices suggests that unchecked risk-taking may be a sign of excess liquidity in the system.
In fact, the president of the Federal Reserve Bank of Atlanta Raphael Bostic published an article on Monday In it, he expressed concern about the potential “pent-up exuberance” that could be unleashed once interest rate cuts begin.
“We don’t think monetary policy is accommodative per se, but the Fed and Powell still have to wonder about it given these existing speculative ‘remnants,'” Macquarie strategists said in a client note on Tuesday. “The key is, A small speculative frenzy coming out of nowhere should make it harder for the Fed to be dovish at this juncture.”
Finally, there are political considerations.
In addition to the usual pressure in a presidential election year, Congress is calling on Powell and his associates to start cutting interest rates. Sen. Elizabeth Warren, D-Mass., who already dislikes Powell, called on the Fed in January to start cutting interest rates because rising rates are particularly painful for low-income households.
Since Warren is a member of the Senate Banking Committee, they will have a chance to discuss the issue on Thursday.
LaVolgna said Powell needs to “justify why the Fed needs to address interest rates given the expectation that inflation may not reach current levels.” “You’ll be damned if you do, you’ll be damned if you don’t. So, I think you need a very solid framework.”
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