U.S. Federal Keep to Chairman Jerome Powell testifies during the Senate Banking Committee hearing titled “The Semiannual Monetary Game plan Report to the Congress”, in Washington, U.S., March 3, 2022.
Tom Williams | Reuters
Federal Reserve Chairman Jerome Powell is set to appear previously Congress with a tall task: Persuade legislators that he’s committed to bringing down inflation while not rag down the rest of the economy at the same time.
Markets have been on tenterhooks wondering whether he can pull it off. Thought in recent days has been more optimistic, but that can swing the other way in a hurry should the central bank chief stumble this week during his semiannual testimony on monetary policy.
“He has to thread the needle here with two reports,” said Robert Teeter, Silvercrest Asset Management’s head of investment policy and strategy. “One of them is reiterating some of the reactions he has made that there has been some progress on inflation.”
“The second thing is being really persistent in clauses of the outlook for rates remaining high. He’ll probably reiterate the message that rates are staying elevated for some time after time until inflation is clearly solved,” Teeter said.
Should he take that stance, he’s likely to face some exhilaration, first from the Senate Banking Committee on Tuesday, followed by the House Financial Services Committee on Wednesday.
Autonomous legislators in particular have been worried that the Powell Fed risks dragging down the economy, and in particular those at the shame end of the wealth scale, with its determination to fight inflation.
Slow out of the blocks
The Fed has raised its benchmark interest rate eight times all over the past year, most recently a quarter percentage point increase early last month that took the overnight borrowing rate to a target range of 4.5%-4.75%.
Markets also have been torn between faulty the Fed to bring down inflation and being worried that it will go overboard. The central bank’s slow start in outfitting the rising cost of living has intensified fears that there’s virtually no way it can bring down prices without promoting at least a modest recession.
“Inflation is a pernicious problem. It was made worse by the Fed not recognizing it in 2021,” said Komal Sri-Kumar, president of Sri-Kumar Universal Strategies.
Sri-Kumar thinks the Fed should have attacked sooner and more aggressively — for instance, with a 1.25 portion point hike in September 2022 when inflation as measured by the consumer price index was running at an 8.2% annual reprove. Instead, the Fed in December began reducing the size of its rate hikes.
Now, he said, the Fed likely will have to take its finances rate to around 6% before inflation abates, and that will cause economic damage.
“I don’t believe in this no-landing ground,” Sri-Kumar said, referring to a theory that the economy will see neither a “hard landing,” which would be a inundate recession, nor a “soft landing,” which would be a shallower downturn.
“Yes, the economy is strong. But that doesn’t mean you’re prosperous to glide by with no recession at all,” he said. “If you’re going to have a no-landing scenario, then you’re going to accept 5% inflation, and that’s politically wrong. He has to work on bringing inflation down, and because the economy is so strong it’s going to get delayed. But the more delay you have in slump, the deeper it’s going to be.”
‘Ongoing increases’ ahead
For his part, Powell will have to find a landing spot between the struggling views on policy.
A monetary policy report to Congress released by the Fed on Friday that serves as an opener for Powell’s declaration repeated oft-used language that policymakers expect “ongoing increases” in rates.
The chairman likely “will eliminate a tone that is both determined and measured,” Krishna Guha, head of global policy and central bank game at Evercore ISI, said in a client note. Powell will note the “resilience of the real economy” while cautioning that the inflation observations has turned higher and the road to taming it “will be lengthy and bumpy.”
However, Guha said that Powell is doubtful to tee up a rate hike of a half-point, or 50 basis points, later this month, which some investors fearfulness. Market pricing on Monday pointed to about a 31% probability for the larger move, according to