Federal Reserve Chairman Jerome Powell said he believed inflation was receding, but he was not yet confident that price gains could continue to slow to the Fed's 2% target.

“I do have some confidence that inflation is receding, and the question is: Are we confident enough that we can get it down to 2% sustainably? I’m not prepared to say that,” Powell told House members on Wednesday, a second day of testimony in Washington.

Powell reiterated his testimony before the Senate Banking Committee on Tuesday, saying that recent price readings showed "modest further progress" and that "more good data" would increase the Fed's confidence that inflation will return to its 2% target. Powell said the Fed has made considerable progress in fighting inflation and does not need to wait until inflation falls to 2% before starting to cut interest rates.

Powell has avoided sending any strong signals about the timing of a rate cut, even as he stressed that policymakers face the risk of moving too quickly or too slowly.

Powell said those risks are more balanced now than in the past, and while Fed officials remain committed to lowering inflation, they are also concerned about unemployment. “The work on inflation is not done, and we have more work to do,” he said, adding that policymakers are also very concerned about “substantial slack in the labor market.”

Powell's speech to Congress indicated that the Federal Open Market Committee (FOMC) is unlikely to cut interest rates at its July 30-31 meeting. The Fed has kept its policy rate in a range of 5.25% to 5.5% for nearly a year, a level not seen in more than two decades.

Balance Sheet

Powell also told lawmakers that Fed officials have more work to do in shrinking their balance sheet.

“We’ve made considerable progress. We think we have a long way to go,” he said in testimony before the House Financial Services Committee.

The Fed has reduced its holdings by about $1.7 trillion so far, and officials expect to significantly reduce its balance sheet, continuing to unwind holdings that were swollen as the central bank snapped up Treasury bonds and mortgage-backed securities to stabilize markets and support the economy during the coronavirus pandemic.

The Fed in June slowed the pace at which it let bonds flow off its balance sheet, a move Powell said would make officials more cautious as they try to prevent bond holdings from falling too low.

Policymakers want to avoid a repeat of 2019, when a reserve shortage sent short-term borrowing costs soaring.

“Going a little slower might actually get us further,” Powell said.

Banking Rules

Powell reiterated comments he made Tuesday before the Senate Banking Committee that regulators are close to agreeing to changes to a plan that forces big banks to significantly increase their capital holdings - a move that could mark a major victory for Wall Street banks.

He said they are discussing a revised proposal with other banking agencies and will release it soon. The proposal could force the largest U.S. lenders to hold up to 19% more capital to cushion losses. Not all parts of the plan will be republished for comment, he added.

Asked whether the Fed is a leader among its peers, he said that while the Fed’s Michael Barr is seen as the architect of the plan, conversations so far between it and the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency have been “rigorously collaborative” and “very productive.”

“Banks are going to have to live with these changes for a long time,” Powell said of the final rule.

September Clues

Market focus is on whether officials will provide more clues about a possible rate cut in September after their July meeting.

While the labor market has held up amid rising pressure on interest rates, rising unemployment has added political pressure on Fed officials to start lowering borrowing costs. The Fed’s preferred inflation measure rose 2.6% in the 12 months through May, down from 7.1% in June 2022. While the unemployment rate remains low at 4.1%, it has risen in each of the past three months.

U.S. Congressman Mike Lawler asked Powell at a hearing on Wednesday: "Will a September rate cut (which investors currently believe is about 70% likely) be seen as a political act trying to change the campaign landscape before the U.S. election on November 5?" Powell refuted the above statement and said the Fed will make interest rate decisions "when necessary."

“Our commitment is to make decisions when needed based on the data, the incoming data, the changing outlook and the balance of risks, and not based on other factors, including politics,” he said. “We always do that, including in election years... Everything we do is based on evidence. It is inappropriate for us to consider the election cycle (when making interest rate decisions) in any case.”

Powell: I haven't spoken to Biden in two years

Powell said he had not seen any signs of mental or cognitive decline in President Joe Biden during phone calls or meetings with him. They last spoke more than two years ago.

Rep. Mike Lawler (R-Calif.) asked Powell if he had any private talks with Biden since their public meeting in May 2022. Powell said, "I haven't met with him yet. He has no plans to schedule a meeting with me, and of course, I have no plans to do so. It's not surprising that there hasn't been a recent meeting with the president, because the Federal Reserve is an independent institution, and Biden has always respected that."

Asked if he noticed any signs of mental or cognitive decline in the president during their interactions, Powell said he did not.

The neutral interest rate has risen in the short term and will be taken into account in the next policy review

Powell said the neutral rate has risen, at least in the short term. Institutional analysis believes that a higher neutral rate means a higher long-term policy rate. At present, this is not surprising and is unlikely to affect the market in the short term. The policy rate has remained high for longer than initially expected because inflation and the labor market have been slow to respond.

But Powell added that this is something the Fed will study in its next policy review, which begins at the end of this year, so it could have an impact on long-term interest rates in the future. Powell's view on the neutral rate is therefore relatively hawkish, while the Fed's expert on this, New York Fed President Williams, continues to argue that the neutral rate has not been raised.

Article forwarded from: Jinshi Data