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Fed Chair Powell Stays Neutral in Senate Testimony

In this morning’s Congressional testimony, Federal Reserve chair Jerome Powell avoided clearly telegraphing a September rate cut, instead maintaining the nuanced stance that has characterised his comments over the last month. According to remarks prepared for the Semiannual Monetary Policy Report, released shortly before the live appearance, Powell underlined a growing focus on both sides of the central bank’s dual mandate, saying “the risks to achieving our employment and inflation goals are coming into better balance”.

On price risks, the chair said “inflation has eased notably in recent years,” but remains above target, and is showing only “modest further progress” in monthly readings.

Growth has “moderated” this year, but remains strong, with private domestic demand staying elevated, consumer spending continuing to increase, and residential investment seeing a “pickup,” even as supply conditions improve.

Somewhat surprisingly, Powell seemed relatively unconcerned about the state of labour markets, saying “a broad set of indicators suggests that conditions have returned to about where they stood on the eve of the pandemic: strong, but not overheated”.

On the outlook for rate cuts, Powell repeated language found in the Policy Report itself, saying, “We continue to make decisions meeting by meeting. We know that reducing policy restraint too soon or too much could stall or even reverse the progress we have seen on inflation. At the same time, in light of the progress made both in lowering inflation and in cooling the labour market over the past two years, elevated inflation is not the only risk we face. Reducing policy restraint too late or too little could unduly weaken economic activity and employment”.

And – in a possible attempt to forestall political criticism of a pre-election move – the chair noted “Congress has entrusted the Federal Reserve with the operational independence that is needed to take a longer-term perspective in the pursuit of our dual mandate of maximum employment and stable prices”.

The dollar is inching higher, Treasury yields are up slightly, and equity indices are seeing modest retreats as traders incrementally lower the odds on a rate cut at the September meeting – yet two moves are still fully priced in by the end of December, suggesting that today’s comments have done little to shift market views.

At the central bank’s June meeting, the rate-setting committee’s median projection for rate cuts was lowered to just one by the end of this year, but data in the intervening weeks has painted a clear picture of slowing economic momentum, and officials have incrementally softened the hawkish tone that prevailed through much of the first half.

Thursday’s June consumer price index and Friday’s producer price release could see markets move more aggressively as expectations are dialled in more closely – particularly if both reports show clear signs of easing inflation pressures.

Powell will address questions from senators after delivering opening comments, but the performative nature of the proceedings should limit any market implications. You can watch the livestream here: https://www.banking.senate.gov//hearings/07/01/2024/the-semiannual-monetary-policy-report-to-the-congress

He is expected to submit identical remarks to the House financial services committee tomorrow.

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