Interest rate hikes have not been paused! Powell's latest speech: Future interest rates may increase inflation | Time | Interest rates

On Wednesday local time, Federal Reserve Chairman Powell attended a hearing of the House Financial Services Committee on the semi annual monetary policy report. Powell said that the Federal Reserve may raise interest rates more in the future. At the same time, attention will be paid to the follow-up impact of monetary policy, and more measures will be introduced in financial regulation. He believes that the US dollar will continue to maintain its reserve currency status.

Interest rate hikes are not temporary, and inflation remains severe

Regarding last week's decision by the Federal Reserve, Powell once again refuted the view that it was described as a "pause". "We did not use this word, and I will not use it here today. The" Economic Forecast Summary "released last week included the prospect of two more interest rate hikes by the end of the year, which is a good guess that the economy is performing as expected."

The Chairman of the Federal Reserve reiterated his determination to achieve price targets. "We are still committed to reducing the inflation rate to 2% and maintaining stable long-term inflation expectations. Restoring price stability is crucial for laying the foundation for achieving maximum employment and long-term stable prices."

Powell stated that inflation has cooled down, but there is still more work to be done. "Since the middle of last year, inflation has eased somewhat, but despite this, the pressure remains high, and the process of reducing the inflation rate to 2% still has a long way to go."

After reaching a nearly 40 year high in July last year, inflation in the United States began to decline. The latest data shows that the core consumer expenditure price index (PCE), which is the most favored price indicator by the Federal Reserve and does not include food and energy, saw a year-on-year growth rate of 4.4% in April, the lowest in nearly two years.

Powell is satisfied with anchoring inflation expectations

Powell further discussed the main driving factors of recent inflation, as housing supply and demand are returning to the right track. With rental increases cooling down, it is expected that housing inflation will significantly decrease. But the response of the service industry to interest rate hikes and capital costs is much smaller.

The Chairman of the Federal Reserve stated that it is necessary to slow down economic growth to below trend levels on how to achieve the goals. Although inflation levels remain high, long-term inflation expectations seem to be gradually anchored, reflected in extensive surveys of households, businesses, and forecasters, as well as measurements of financial markets. The previously released University of Michigan Consumer Confidence Survey showed that the one-year inflation outlook has dropped to 3.3%, the lowest level since March 2021.

Pay attention to the follow-up effects of policies and strengthen banking supervision

Powell still maintains a cautious stance on when to decide on the next interest rate hike. He stated that the Federal Reserve will evaluate and make decisions at each meeting based on the data received, rather than following a predetermined route. It is currently difficult to confirm what level of interest rates will help the Federal Reserve achieve its dual goals of full employment and price stability.

Powell stated that the US labor market remains tight as soon as possible, but there are signs that supply and demand conditions are easing, such as increased labor force participation and slower wage growth in the age group of 25 to 54. However, the number of vacant positions still far exceeds the available workforce. "We have been seeing the impact of policy tightening on demand in the most interest rate sensitive sectors of the economy. The full effect of monetary tightening will take time to achieve, especially its impact on inflation."

Guatieri, Senior Economist at Bank of Montreal, stated in an interview with First Financial News that the Federal Reserve's decision to keep interest rates unchanged is to better assess economic and inflation trends, thereby reducing the risk of policy errors leading to a severe recession.

Powell talked about the previous banking crisis at the hearing and believed that the US banking system is still stable. The Federal Reserve, Treasury Department, and Federal Deposit Insurance Corporation have taken decisive actions to protect the US economy and enhance public confidence in our banking system. The lesson of this turmoil is the importance of establishing appropriate rules and regulatory practices for financial institutions, with a focus on the commercial real estate sector, where many small banks hold loans.

He revealed that the Federal Reserve is expected to consider bank capital proposals in the summer of 2023. "There are many proposals in the pipeline. Any changes in capital rules or other regulations need to be proven reasonable. Any changes will take time and will not affect the industry in the short term."

According to previously disclosed media reports, under the new policy proposed by the Federal Reserve, the US banking industry will face a requirement for a maximum capital increase of 20%, which is also part of global banking policy collaboration to enhance the risk resistance of the financial system. The proposal is expected to implement the final batch of new bank capital regulations formulated by the Basel Committee on Banking Supervision, which will take effect in early 2025.

The stance of the Federal Reserve has sparked dissatisfaction from the Republican side, fearing that strict capital and rules will exert too much pressure on the financial sector.

The Chairman of the House Financial Services Committee, Mike Henry, stated that Congress will consider limiting the Federal Reserve's role in regulating banks. "The uncertainty of Federal Reserve supervision and regulation is the least necessary for a capital sufficient banking system. It is clear that Congress may need to re-examine the separation of regulatory powers from the Federal Reserve," he said.

Currently, the outside world is closely monitoring the Federal Reserve's annual bank stress test this year, and the results will be announced on June 28th. Stress testing is used to measure whether financial institutions have sufficient capital to cope with losses and continue lending to households and businesses in a severe recession environment. Based on the previous banking turmoil, this year's scenario includes a severe global economic recession, intensified pressure on the commercial and residential real estate markets, and additional market shocks. A total of 23 banks participated in this evaluation.

Guatieri believes that the Federal Reserve is in a dilemma, on the one hand, if further progress is not made in cooling inflation, interest rate hikes will be inevitable. On the other hand, the impact of the interest rate hike cycle on the banking industry has not yet fully emerged, and as credit conditions tighten, the economy will face severe tests. "The US economy will experience a slight contraction in the second half of the year, making it impossible to achieve a soft landing," he said.

Powell also stated at the hearing that it is expected that the US dollar will continue to be the world's reserve currency. The status of the US dollar as the world's reserve currency is very important to us. History has shown that the status of the global reserve currency is not permanent, but it is persistent, and institutional stability will ensure the status of the US dollar. According to data from the International Monetary Fund (IMF), in the fourth quarter of 2022, the US dollar's share in global official foreign exchange reserves dropped to a 20-year low of 58%.

According to the schedule, Powell will continue to be questioned by members of the Senate Banking, Housing, and Urban Affairs Committee on Thursday regarding the semi annual monetary policy report.