Federal Reserve Chairman Jerome Powell attends a House Financial Services Committee hearing on June 21, 2023 in Washington, DC.
Nathan Howard | Bloomberg | Getty Images
Federal Reserve Chairman Jerome Powell headed to Capitol Hill on Wednesday, with markets hoping for more clarity on how the central bank plans to pursue monetary policy this year.
The past few months have seen the dynamics between financial markets and the Fed shift over the pace and timing of rate cuts expected this year. Markets are having to adjust their overall view from highly accommodative central banks to more cautious and cautious central banks.
Mr. Powell will be asked to provide sharper views and avoid upsetting a nervous Wall Street, as Congressional mandated testimony takes place in the House of Representatives on Wednesday and the Senate on Thursday. .
“The challenge for markets now is to gather information about when the Fed will start cutting rates and how many cuts they will make,” said Quincy Crosby, chief global strategist at LPL Financial. Ta. “He’s not necessarily going to answer that. But if there’s any change or nuance, that’s what the market wants.”
At the heart of the question of how the Fed will act going forward is its view on inflation and how Mr. Powell expresses it. They have said in recent weeks that it is too early to ease monetary policy, expressing satisfaction with price trends while worrying that risks still lurk.
Markets now expect the Fed to begin cutting interest rates in June, amounting to a total of a quarter-point rate cut, by the end of the year, according to futures pricing measured by CME Group. Policymakers have signaled three rate cuts in December, but most have avoided giving a timeline.
Mixed signals complicate messages
On the issue of inflation, the data were largely supportive.
Inflation measurements for the second half of 2023 showed a clear trend toward the Fed’s 2% target. However, January brought a shock as it showed that consumer prices, particularly shelter costs, remained elevated, posing a threat to this trend.
Mr. Powell will need to carefully synthesize recent trends before speaking first to the House Financial Services Committee on Wednesday and then to the Senate Banking Committee the following day.
“The message is not ‘mission accomplished,’ but ‘we’ve made a lot of progress and we expect a rate cut to come,'” said Joseph LaVogna, chief economist at SMBC Nikko Securities. ” he said. “I think that’s going to be the central message for me.”
Mr. Powell’s Congressional testimony comes at a ticklish time for the market: continued concerns about the fate of interest rates after hitting historic highs, and the outlook for some of the big tech companies that have been leading the market thus far. Major stock averages sold off this week amid sudden uncertainty. The price will be higher.
Both situations are of concern to policymakers. While large increases in risk asset prices reflect easing financial conditions and could cause the Fed to tighten policy, lower environmental uncertainty may keep interest rates too high for too long. There is a possibility that there will be growing concerns that this may occur.
Stephen Rituto, chief U.S. economist at Mizuho Securities, wrote that Powell “cannot completely deviate from the committee’s “data-dependent but serious interest rate cut” approach. Referring to the policy-setting Federal Open Market Committee, he said, “Rapid fluctuations in financial conditions are a challenge to the committee’s objective of maintaining tight labor market conditions while keeping inflation expectations and long-term interest rates at an appropriate level.” They can easily intersect with each other.” .
political concerns
There are other circumstances surrounding Mr. Powell. Several economists, including Mr. Lavogna, believe that despite the apparent strength of the unemployment rate of 3.7%, working conditions are worsening. Also, the recent surprising rise in crypto prices suggests unfettered risk-taking, which could indicate too much liquidity is being drained around the system.
Indeed, Atlanta Fed President Rafael Bostic published an essay on Monday expressing concern about the potential for “pent-up euphoria” that could be unleashed once rates begin to cut.
“While we do not believe that monetary policy itself is accommodative, given the ‘debris’ of this speculation, we still think the Fed and Chairman Powell should question this,” Macquarie strategists said in a note to clients on Tuesday. I need to embrace it.” “The point is, the small speculative frenzy that comes out of nowhere should make it even harder for the Fed to be dovish at this point.”
Finally, there are political considerations.
In addition to the usual pressures during a presidential election season, there are also calls for Mr. Powell and his allies to start lowering rates. Sen. Elizabeth Warren (D-Mass.), who has never been a fan of Powell, called on the Fed in January to start lowering interest rates because higher rates are especially painful for low-income households.
Warren is a member of the Senate Banking Committee, so she will have a chance to discuss the issue on Thursday.
LaVogna said Powell “needs to make the case for why the Fed needs to address interest rates, anticipating that inflation is likely not there right now.” “It’s going to be terrible if we do it, and it’s going to be terrible if we don’t do it. So I think we need a very solid framework.”
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