Jay Powell is set for a high-stakes appearance before Congress on Tuesday, as the Federal Reserve weighs how aggressively to keep raising interest rates in the face of stubbornly high inflation.
Powell’s testimony before the Senate Banking Committee will be the Fed chair’s first public remarks since troubling inflation data releases showed the central bank is still struggling to cool the US economy despite its year-long campaign of monetary tightening.
The Fed’s main interest rate is at a target range between 4.5 and 4.75 per cent, compared to near-zero at this time last year. But Fed officials have increasingly signalled they will have to lift it more — and keep it higher for longer — to ensure a more rapid decline in inflation towards the central bank’s 2 per cent target.
Lawmakers and investors will be looking for clues from Powell as to whether he favours another one-notch 25 basis point rate increase at the next Federal Open Market Committee meeting on March 21-22 or if he might consider a more hefty 50 basis point increase.
They will also be looking for signals of a shift in the Fed’s expectations of how high it will have to raise rates overall this cycle. In December, Fed officials projected interest rates will reach a peak of 5.1 per cent this year.
But Powell may want to withhold judgment on both fronts because there is still one important monthly jobs data report due on Friday, and another month of inflation data next week, before the FOMC decision.
“Powell will stick to hawkish themes, but will he be more hawkish than what’s already priced into rates?” Tim Duy, chief US economist at SGH Macro Advisors, wrote in a note on Monday.
Krishna Guha and Peter Williams of Evercore ISI said: “We think the Fed chair will open the door to a calibrated upward move in the estimated peak interest rate in March if the next batch of data confirms the strength from January, but will not turn max hawkish or fuel speculation of a 50bp move.”
Politically, Powell is likely to face renewed pressure from Republicans to be aggressive and not fall behind the curve in tackling inflation. But Democrats have been growing increasingly anxious that the Fed will go too far in tightening monetary policy, triggering a recession that could undermine many of the labour market gains achieved during the recovery out of the pandemic.
Meanwhile, Powell is also expected to face questions on banking regulation, with Democrats pressing the Fed to tighten capital standards for the largest institutions, and Republicans pleading for a looser treatment. Michael Barr, the Fed’s vice-chair for supervision, is leading a review of capital rules.
