Powell to update Fed stance on disinflation ahead of Congress

By Howard Schneider

WASHINGTON, March 7 (Reuters) – At his last press conference, U.S. Federal Reserve Chairman Jerome Powell confidently asserted that a “disinflationary process” had begun, showing that the course had been significantly “rewarding” even as he promised the central bank’s fight against rising prices was not over.

But inflation data since his Feb. 1 comments have moved the other way — a ‘surprise’ Citigroup inflation index rose in February for the first time in months — and when Powell testifies before the committee Banking Senate Tuesday, the focus will be on whether he remains as confident as he is now that the Fed is on track to keep inflation steadily down toward its 2% target.

Policymakers making remarks following the latest inflation data opened the door to another interest rate hike in response, and investors and economists raised their own expectations about the extent to which the Fed could possibly raise the target interest rate.

Powell’s testimony and answers to lawmakers’ questions will be his first public chance to say whether he views the recent data as an “anomaly,” as one of his colleagues suggested, or as evidence that the Fed lags behind inflation. curve and is likely to support the economy even more than currently expected.

The hearing, one of the Federal Reserve Chairman’s two annual appearances before Congress, begins at 10:00 a.m. EST (1500 GMT) and will be followed by a session before the House Financial Services Committee on Wednesday. .

Although ostensibly focused on monetary policy, the questions often cover a range of topics, and this week’s sessions — the first since Republicans took control of the House after the midterm elections — could be particularly vast.

Powell’s last monetary policy hearing before Congress took place in June, at the start of what has become the Fed’s most aggressive rate hike cycle since the 1980s. . contributed to volatility in traditional stock markets as well as alternative assets like cryptocurrencies, and sparked broader debates about the Fed’s effectiveness.

Some analysts, for example, have focused on the billions of dollars in losses now being generated by Fed operations as it pays higher rates on deposits that big banks hold in their reserve accounts at the central bank than what it earns from its own assets. US government debt and mortgage-backed securities.

Others have focused on the Federal Reserve’s repeated statements that unemployment must rise for inflation to fall, a conclusion that may be particularly criticized by Senate and House Democrats.

The Fed rate hikes “are designed to hurt the labor market. We don’t see inflation because of greedy workers (…) What we have seen are a number of factors” that boost inflation, from expanding profit margins to the war in Ukraine, which are not particularly influenced by interest rates, said Rakeen Mabud, chief economist at labour-focused think tank Groundwork Collaborative, on the eve of the hearings.

Inflation has fallen since Powell last appeared before Congress. After reaching an annual rate of 9.1% in June, consumer price inflation fell to 6.4% in January; The personal consumption expenditure price gauge, which the Federal Reserve uses as the basis for its 2% target, peaked at 7% in June and had fallen to 5.4% in January.

But, as Powell will almost certainly reiterate, gains have been tepid, and in the case of January data the CPI fell less than expected, revised stats from previous months showed fewer gains than Powell had between hands at his press conference, and PCE inflation actually rose.

What is surprising for the Fed, and which should also be the focus of the hearings, is the fact that the United States has so far absorbed central bank interest rate hikes without any serious loss of economic momentum. nor any signs that companies are on the brink of mass layoffs. .

In fact, economic and job growth continued to be faster than expected, and January brought another jolt to Powell in the form of more than half a million additional jobs and unemployment. 3.4% not seen since the sixties. Despite some high-profile layoff announcements, weekly new jobless claims have remained below 200,000 for seven straight weeks, levels comparable to pre-pandemic levels.

This force posed to Powell the key question: whether the impact of monetary policy has only been delayed and is on the way, or whether the current economy needs even tighter monetary policy, with all the risks that entails.

(Reporting by Howard Schneider; Editing by Dan Burns and Nick Zieminski, Spanish editing by José Muñoz in the Gdańsk newsroom)