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The Fed’s Powell heads to Capitol Hill this week, and he’s going to have his hands full

BusinessEconomyThe Fed's Powell heads to Capitol Hill this week, and he's going to have his hands full
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US Federal Reserve Chairman Jerome Powell testifies during a Senate Banking Committee hearing titled “The Seminal Monetary Policy Report to Congress” on March 3, 2022 in Washington, US.

Tom Williams | reuters

chairman of the federal reserve Jerome Powell is set to appear before Congress with a big task: persuading legislators that it is determined to bring down inflation while not dragging down the rest of the economy at the same time.

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The market is confused whether it can pull it off. Sentiment has been more optimistic in recent days, but it could turn the other way in a hurry if central bank leaders stumble during their semiannual testimony on monetary policy this week.

“He’s hitting the needle with two messages here,” said Robert Teeter, head of investment policy and strategy at Silvercrest Asset Management. “One of them is reiterating some of his comments that there has been some progress on inflation.”

“The other thing has been really consistent in terms of the outlook for rates staying high,” Teeter said. He’ll probably reiterate the message that rates will remain high for a while until inflation clearly resolves. “

Should he take that stand, he could face some trouble first from the Senate Banking Committee on Tuesday, then from the House Financial Services Committee on Wednesday.

Democratic legislators are particularly concerned that Powell is dragging the Fed down on the economy, and especially on the low end of the money scale, with its determination to fight inflation.

slowly out of the blocks

Fed raised its benchmark interest rate Eight times over the past year, most recently a quarter percentage point increase early last month, which took the overnight lending rate to a target range of 4.5%-4.75%.

Markets are also torn between the Fed’s desire to reduce inflation and concerns that it will go overboard. The central bank’s slow start in tackling the rising cost of living has fueled fears that there is no way to bring down prices without at least a minor recession.

“Inflation is a devastating problem. The Fed not recognizing it in 2021 has made it worse,” said Komal Sri-Kumar, president of Sri-Kumar Global Strategies.

Mr-Kumar feels the Fed should have attacked sooner and more aggressively – for example, with a 1.25 per cent hike in September 2022 when Inflation as measured by the Consumer Price Index was running at an annual rate of 8.2%. Instead, the Fed began reducing the size of its rate hikes in December.

Now, he said, the Fed will probably have to move its funds rate to around 6% before inflation subsides, and that will do economic damage.

“I don’t believe in this no-landing scenario,” Mr-Kumar said, referring to a theory that the economy would see neither a “hard landing”, which would be a sharp recession, nor a “soft landing”, which would be a shallow one. There will be a decline.

He said, “Yes, the economy is strong. But that does not mean that you will go ahead without any recession.” “If you’re going to have a no-landing scenario, you’re going to accept 5% inflation, and that’s politically unacceptable. He has to work on getting inflation down, and because the economy is so strong that It’s going to get.” was delayed. But the longer you are in a recession, the deeper the recession will be.”

‘moving on’

For his part, Powell must find a landing spot amid competing views on policy.

A monetary policy report The Fed’s release on Friday served as an opener to Joe Powell’s testimony to Congress, which repeatedly used language that policymakers expect “ongoing increases” in rates.

The chairman will likely “strike a tone that is both firm and measured,” Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said in a client note. Powell would note the “resilience of the real economy” while warning that inflation figures have been overstated and that the road to taming it will be “long and bumpy.”

However, Guha said Powell is unlikely to go for the half-point or 50 basis points rate hike later this month, which some investors fear. Market valuation on Monday pointed to around 31% probability for a big move cme group data,

Guha wrote, “We think the Fed hikes by 50 bp in March only if inflation expectations, wage and services inflation, turn dangerously high and/or incoming data are so strong that the average peak The rate goes up to 50.” “The Fed cannot end a meeting any further from its destination than before the start of the meeting.”

However, going forward it will be difficult to interpret the data.

Headline inflation may actually show a sharp decline in March because of the pop in prices at the same time last year, distorting year-over-year energy price comparisons. Cleveland Fed Tracker Inflation for all items falls from 6.2% in February to 5.4% in March. However, core inflation, excluding food and energy, is projected to rise to 5.7% from 5.5%.

Guha said it’s likely Powell could guide the Fed’s endpoint for rate hikes — the “terminal” rate — to the 5.25%-5.5% range, or a quarter point more than policymakers expected in their December economic projections. .

A hard landing will shift public policy and change the stock outlook, says economist Hugh Johnson

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