Jay Powell will defend the Fed’s decision to back away from raising interest rates at its latest policy meeting, but he will signal that the battle with inflation is not over in speeches prepared for a key congressional meeting on Wednesday.
U.S. central bank Chairman Jerome Powell will tell lawmakers on the House Financial Services Committee that it would be “prudent” not to raise rates last week given the “magnitude and speed” at which the Fed has raised its benchmark interest rate since March 2022. For more than a year, the federal funds rate has risen from near zero to a range of 5% to 5.25%.
Powell will start his first day of two days of semiannual testimony before Congress by saying that the “full impact of monetary tightening” will take time to materialize. He will also highlight the potential “headwinds” for the world’s largest economy from tightening credit standards following the collapse of Silicon Valley banks in March.
However, Powell will signal that the central bank still has more work to do to squeeze the economy to keep inflation under control.
“Inflation has moderated since the middle of last year,” he said. “Nevertheless, inflationary pressures remain elevated and the process of bringing inflation back to 2% is still a long way off.”
His comments came after the Fed’s latest policy meeting last week, in which officials opted to hold rates steady after 10 straight hikes in order to better assess the central bank’s need to raise borrowing costs further to curb stubborn interest rates. high inflation.
Powell last week called the move both “reasonable” and “common sense” as he was forced to defend the Fed’s decision to pause what has become the most aggressive monetary tightening in decades at a time when inflation concerns remain rampant.
While unchanged at the latest meeting, Fed officials said in their latest “dot plot” of their personal forecasts that they backed two quarter-point rate hikes this year. Powell signaled at the time that action could come as early as the next policy meeting in July.
If both increases are implemented, that would eventually raise the funds rate to 5.5% to 5.75%. No cuts are expected until 2024.
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Democratic lawmakers will press Powell over the economic pain from the Fed’s efforts to curb inflation. According to forecasts released last week, most Fed officials now expect stronger economic growth this year than they did three months ago, but still expect the unemployment rate to be nearly 1 percentage point higher than the current 3.7%. An increase of this magnitude is usually associated with a recession.
Meanwhile, Republicans are likely to question Powell’s decision to pause monetary tightening amid ongoing concerns about price pressures.
In their latest forecasts, Fed policymakers lowered their expectations for how quickly “core” inflation, which excludes food and energy prices, will decline this year. Most now expect it to slow to just 3.9% by the end of the year, 0.3 percentage points higher than forecast in March. It has hovered around 4.7% in recent months.