A recap of Fed Chair Powells comments to the Senate

“The on-the-day equity market surge is in part a relief rally,” wrote Krishna Guha, head of global policy and central bank strategy at Evercore ISI. “Many investors feared the Fed chair would take a max hawkish sledgehammer to the recent easing of financial conditions … That overhang has now gone. Echoing recent statements from other central bank officials and comments at the November Fed meeting, Powell said he sees the central bank in position to reduce the size of rate hikes as soon as next month. We carefully monitor a wide range of indicators of longer-term inflation expectations. These measures today are at levels broadly consistent with our 2 percent objective .

However, core inflation, excluding food and energy, is projected to increase to 5.7% from 5.5%. However, Guha said that Powell is unlikely to tee up a rate hike of a half-point, https://day-trading.info/ or 50 basis points, later this month, which some investors fear. Market pricing on Monday pointed to about a 31% probability for the larger move, according to CME Group data.

WATCH: Federal Reserve Chair Jerome Powell faces questions after interest rate decision

Bond market pros had been waiting for Powell’s view on why rates were rising and whether he was concerned by it. The stimulus program is expected to get through Congress largely intact but with little or no Republican support. A key objection to the plan is the impact it would have on a federal budget deficit, which is already projected to be $2.3 trillion this year not counting the administration’s proposal. And if the inflation data doesn’t cool, we’ll soon be talking about 6%, Gregory noted. “Yes, the economy is strong. But that doesn’t mean you’re going to glide by with no recession at all,” he said. “The Fed will have several key metrics in hand before their next meeting, including another look at retail sales and inflation,” Roach says.

• The Fed’s hikes typically make mortgages, auto loans, credit card rates and business lending more expensive.
• Powell countered that inflation also is hammering those at the bottom end of the income spectrum.
• The time for moderating the pace of rate increases may come as soon as the December meeting.
• The rapid reopening of the economy has brought a sharp run-up in inflation.
• My colleagues and I are acutely aware that high inflation is imposing significant hardship, straining budgets and shrinking what paychecks will buy.

Companies pass on rising labor costs to customers by raising prices on goods and services, further contributing to inflation. Unfortunately, the tight labor market is likely undermining the Fed’s efforts to get prices under control. More impactful for Fed policy was data showing that average U.S. wages grew 4.4% over the prior 12 months, the lowest rate since August 2021, down from 4.8% in December. Wage growth was revised higher for 2022, which means there was only a very moderate pace of cooling in wage inflation last year. To really answer the question of how many rate hikes are left, you need a crystal ball that would allow you to peer into the future and discover when inflation will return to the Fed’s long-term target rate of around 2%.

Fed Chair Powell says smaller interest rate hikes could start in December

Stocks tumbled Tuesday then again on Thursday as investors grew more nervous about the Fed’s future path. Thursday’s sell-off, however, did trigger a shift lower in terms of expectations for a half-point hike this month, down to 58% most recently, according to a CME Group estimate. The appearance is part of the congressionally mandated semiannual report on monetary policy.

The spike in inflation is so far largely the product of a relatively narrow group of goods and services that have been directly affected by the pandemic and the reopening of the economy. Durable goods alone contributed about 1 percentage point to the latest 12‑month measures of headline and core inflation. Energy prices, which rebounded with the strong recovery, added another 0.8 percentage point to headline inflation, and from long experience we expect the inflation effects of these increases to be transitory. In addition, some prices—for example, for hotel rooms and airplane tickets—declined sharply during the recession and have now moved back up close to pre-pandemic levels. The 12-month window we use in computing inflation now captures the rebound in prices but not the initial decline, temporarily elevating reported inflation.

Fed’s Powell heads to Capitol Hill this week, and he’s going to have his hands full

We had that jobs report last week– 517,000 payrolls, keeping the upside risk to inflation high. Asked about the time it might take for inflation to return to the Fed’s 2% target, Powell suggested this process would likely take into next year. As for the Fed’s current 2% target — which some commentators, including Rubenstein, have suggested could need to be changed in favor of a higher target — Powell said this remains a firm target.

Housing services inflation measures the rise in the price of all rents and the rise in the rental-equivalent cost of owner-occupied housing. Unlike goods inflation, housing services inflation has continued to rise and now stands at 7.1 percent over the past 12 months. Measures of 12-month inflation in new leases rose to nearly 20 percent during the pandemic but have been falling sharply since about midyear . Early in the pandemic, goods prices began rising rapidly, as abnormally strong demand was met by pandemic-hampered supply. Reports from businesses and many indicators suggest that supply chain issues are now easing.

Participation dropped sharply at the onset of the pandemic because of many factors, including sickness, caregiving, and fear of infection. Many forecasters expected that participation would move back up fairly quickly as the pandemic faded. The unemployment rate at the time was much higher than the 3.5 percent that had prevailed without major signs of tightness before the pandemic. Employment was still millions below its level on the eve of the pandemic.

‘Trading any speech is tough, so I’d be reacting and not anticipating,’ analyst says

The Fed is also expected to continue to allow up to $60 billion in Treasury securities and $35 billion in agency mortgage-backed securities to mature and roll off its balance sheet per month. John Lynch, chief investment officer at Comerica Wealth Management, says January’s inflation hiccup is bad news for Powell’s inflation fight. However, Powell said short-term data can be deceptive and he needs to see more consistent evidence. Markets took a more dovish tone from Powell’s speech, with the top rate put at just shy of 5% by May 2023 and bets that the Fed will cut half a point by the end of the year. “Headline versus Core Inflation in the Conduct of Monetary Policy,” speech delivered at the Business Cycles, International Transmission and Macroeconomic Policies Conference, HEC Montreal, Montreal, October 20.

Powell said he expects the buying to continue until the Fed makes progress on its goals. Missive from federal health officials comes in response to a letter in which the Florida surgeon general voiced concerns about what he described as adverse effects from mRNA vaccines. Sign Up NowGet this delivered to your inbox, and more info about our products and services. 4 best stocks under $5 for trading for less Democratic legislators in particular have been worried that the Powell Fed risks dragging down the economy, and in particular those at the lower end of the wealth scale, with its determination to fight inflation. Democratic legislators in particular have been worried that the Powell Fed risks dragging down the economy with its determination to fight inflation.

“Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” he added. “The time for moderating the pace of rate increases may come as soon as the December meeting.” Central banks have always faced the problem of distinguishing transitory inflation spikes from more troublesome developments, and it is sometimes difficult to do so with confidence in real time. At such times, there is no substitute for a careful focus on incoming data and evolving risks.

Sen. Robert Menendez, a member of the Banking Committee, has urged the Biden administration to fill the spot with a Hispanic. Menendez notes that there has never been a Hispanic member of the Fed’s rate-setting committee. Other issues will likely arise when Powell testifies Tuesday to the Senate Banking Committee and Wednesday to the House Financial Services Committee. One could be who will replace Lael Brainard, who has left her position as the Fed’s vice chair for a top policymaking post at the White House.

Traders had seen only a 3.3% chance of a 50 basis point rise a month ago. And the panelists did not share the optimism around stocks that we’re seeing in the market. Mike Wilson, on the stage, said that this was purely the January effect taking place. Investors are betting that the Fed will pause and even cut rates this year, as they see inflation come down from highs, as they see some slowdowns in housing and manufacturing. We have a medley of earnings from companies, like Walt Disney, Pepsi, Uber, PayPal, and some others. But for markets, it’s all about what Powell says tomorrow at the Economic Club of Washington DC where he’s scheduled to speak around noon.

The levels of job openings and quits are at record highs, and employers report that they cannot fill jobs fast enough to meet returning demand. Still, Powell’s comments did not suggest Friday’s strong jobs report would change the central bank’s approach to future rate increases. As Powell spoke, stocks rallied to session highs, though markets later gave up those gains in afternoon trading.

Powell’s Legacy Risks Being Tarnished More by SVB Collapse

“He’s adjusting to data coming in, which the entire board should be doing,” Hogan said. “If the facts change again through the February and March data, he’ll likely become flexible on that side and not push this too far to the point where they need to break something.” Federal Reserve Chairman Jerome Powell’s prepared speech this week to Congress took just a few minutes, but it changed everything.

Recent economic data is putting pressure on the Fed to be more aggressive in its monetary policy, economists said. Headline inflation actually could show a precipitous decline in March as year-over-year comparisons of energy prices will be distorted because of a pop in prices around this time last year. The Cleveland Fed’s tracker shows all-item inflation falling from 6.2% in February to 5.4% in March.

The 30-year bond, for instance, is up more than half a percentage point and the benchmark 10-year yield has risen 44 basis points. Monetary policy is playing a role in the rise of some asset prices, Fed Chairman Jerome Powell acknowledged. Powell said fiscal stimulus is not likely to create persistent or large increases in prices. “We’ve been living in a world for a quarter of a century where the pressures were disinflationary,” he said. “Inflation dynamics do change over time, but they don’t turn on a dime.” He told the Senate Banking Committee that there will be temporary base effects in spring inflation data this year, after the very low readings of last March and April.