Powell and the nominees to three Fed board seats will face questions from senators over several hours this morning. They’ll be asked to explain why the Fed decided to keep rates steady last week and why they think bringing inflation under control will take time. The job market is out of balance, with more openings than qualified workers to fill them. That stokes inflation worries because higher wages encourage consumers to spend more. The Fed’s goal is to keep inflation low and stable and the economy strong while supporting workers with better jobs and higher wages. Powell doubled down on his hawkish view that the Fed isn’t done raising rates. He said officials will weigh how to proceed at their upcoming monetary policy meeting in September but that the decision won’t be made until they have seen two more reports on jobs and inflation.
He also signaled that the Fed will continue its balance sheet runoff, even though he acknowledged that there’s a substantial lag between when the tightening hits the economy and how much it impacts credit conditions. Democrats pressed him to keep in mind the Fed’s mandate to reach full employment, warning of job losses and foreclosures if the central bank overdoes it. The market seemed to take the comments in stride, with stocks down and Treasury yields lower. The S&P 500 was down 0.6% to 2,324, and the 2-year note was lower at 3.9%. The dollar was up against most major currencies. The market’s main concern appeared to be concerns about the global economy and trade.
What Did Powell Say?
The Federal Reserve has to do a lot of work to bring inflation down from its recent highs. Inflation is still above the central bank’s target, and Powell emphasized that it will take time to get there. The US labor market remains “extraordinarily strong,” Powell said. He noted that the disinflationary process is underway, with price gains slowing, especially in housing.
Despite his talk of patience, Powell also emphasized that the Fed will continue to raise rates in the near term. He added that the current stance of tightening is necessary to tame inflation. He warned that if the Fed waited too long to raise interest rates, it could be forced to lower them later.
Powell’s remarks may disappoint investors who expected the Fed to signal that it would slow its rate-hiking pace in coming months. But, he reiterated that the central bank is committed to bringing down inflation to its target of two percent.
Powell Speech Effect on Crypto
While stocks and Treasury yields retreated following Powell’s speech, crypto markets were relatively resilient. Bitcoin price rose after the Federal Reserve chair addressed stablecoins, noting that “crypto appears to have staying power as an asset class.” Powell also discussed digital assets during a congressional hearing, including his perspective on their future regulation and the creation of a central bank digital currency (CBDC). In his testimony, Powell stressed the Fed’s independence from political considerations. He noted that the two primary goals of the Federal Reserve are to maintain price stability and achieve maximum employment.
To accomplish these objectives, the Fed uses a variety of tools, including monetary policy and financial supervision. These tools are complementary and play a vital role in maintaining price stability and ensuring a strong economy. However, Powell cautioned that inflation could remain elevated if labor market slack remains tight. This would create a difficult challenge for the Fed to control prices. If this trend continues, the Fed may have to increase rates even faster than expected.