Home Forex The Fed chairman reiterated that the key interest rate is likely at its peak

The Fed chairman reiterated that the key interest rate is likely at its peak

by SuperiorInvest


Federal Reserve Chairman Jerome Powell will tell Congress on Wednesday that they do not expect it to be appropriate to cut the key interest rate until they have more confidence in inflation moving sustainably toward 2%, according to a prepared statement released by the Fed.

Key takeaways from Powell's prepared statement

“It will probably be appropriate sometime this year to start loosening the political restrictions.”

“The policy rate is probably at its peak for this cycle.”

“The economic outlook is uncertain; continued progress toward 2% inflation is not assured.”

“We will carefully assess incoming data, the evolving outlook, the balance of risks.”

“Risk for cutting speed too early and too fast, as well as too late or too little.”

“The labor market remains relatively tight.”

“The Fed's restrictive stance is putting downward pressure on economic activity and inflation.”

“Demand for labor still exceeds supply, growth in nominal wages is slowing.”

“The risks to achieving the dual goals are moving in a better balance.”

“While inflation is still above 2%, it has moderated significantly.”

“The economy has made significant progress over the past year thanks to the dual mandate.”

This section below was published as a preview of Federal Reserve Chairman Jerome Powell's testimony at 12:00 GMT.

  • Jerome Powell's testimony in the US Congress will be a top-level market-moving event.
  • New clues are awaited on the trajectory of the Federal Reserve's interest rates.
  • The US dollar, equity markets and other asset classes could see big swings from the Fed chairman's words.

Jerome Powell, chairman of the Federal Reserve System, will testify in the US Congress on March 6 before the Senate Committee on Banking, Housing and Urban Affairs. The hearing, titled “Semi-Annual Monetary Policy Report to the Congress”, will begin at 15:00 GMT (10:00 US Eastern Standard Time) and will have the full attention of all financial market players.

Jerome Powell is expected to address key findings from the Federal Reserve's semiannual monetary policy report, released last Friday. In that report, the Fed said it remains inappropriate to reduce the target range until policymakers have more confidence that inflation will sustainably move toward 2%, adding that they remain alert to inflationary risks. The publication also reiterated that the risks to achieving the goals have shifted to a better balance.

US representatives are expected to ask Powell about the interest rate outlook, inflation developments and a lengthy question-and-answer session on future interest rate developments and how Fed assess how much monetary policy tightening is needed. Markets could see strong moves to American dollarUS Treasury yields, equity markets and all asset classes, incl Gold price and all major currency pairs during Powell's testimony.

Frequently asked questions about the Fed

Monetary policy in the US is shaped by the Federal Reserve System (Fed). The Fed has two mandates: to achieve price stability and to promote full employment. Its primary tool to achieve these goals is the adjustment of interest rates. When prices rise too fast and inflation is above the Fed's 2% target, it raises interest rates, which raises borrowing costs throughout the economy. This results in a stronger US dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the unemployment rate is too high, the Fed can cut interest rates to encourage lending, which weighs on the dollar.

The Federal Reserve (Fed) holds eight policy meetings a year, at which the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC consists of twelve Fed officials—seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional reserve bank presidents who serve one-year terms on a rotating basis. .

In extreme situations, the Federal Reserve can resort to quantitative easing (QE) policy. QE is the process by which the Fed substantially increases the flow of credit in a troubled financial system. It is a non-standard policy measure used during crises or extremely low inflation. It was the Fed's weapon during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. QE usually weakens the US dollar.

Quantitative tightening (QT) is the reverse process of QE, where the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal of bonds it holds maturing into buying new bonds. It is usually positive for the value of the US dollar.

About Jerome Powell (via Federalreserve.gov)

“Jerome H. Powell first assumed the office of Chairman of the Board of Governors of the Federal Reserve System on February 5, 2018 for a four-year term. He was reappointed and sworn in for a second four-year term on May 23, 2022. Mr. Powell also serves as Chairman of the Federal Reserve Board's open market, the main monetary policy-making body of the system. Mr. Powell has been a member of the Board of Governors since taking office on May 25, 2012 to fill the was reappointed to the board and sworn in on June 16, 2014 for a term ending on January 31, 2028. “

Frequently asked questions about central banks

Central banks have a key mandate that ensures price stability in a country or region. Economies constantly face inflation or deflation when the prices of certain goods and services fluctuate. Constantly rising prices of the same goods means inflation, constant reductions in prices of the same goods means deflation. The central bank's job is to keep demand in line with the adjustment of its base rate. For the largest central banks, such as the US central bank (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

The central bank has one important tool at its disposal to get inflation higher or lower, and that is by adjusting its reference base rate, commonly known as the interest rate. At pre-announced times, the central bank will issue a statement with its monetary policy rate and provide additional justification for either keeping it or changing (lowering or increasing) it. Local banks will adjust their savings and loan rates accordingly, making it harder or easier for people to cash in on their savings or for businesses to borrow and invest in their businesses. When a central bank raises interest rates substantially, it is called monetary tightening. When it lowers its benchmark rate, it is called monetary easing.

The central bank is often politically independent. Members of the central bank's policy board go through a series of panels and hearings before being appointed to a policy board seat. Each member of this board often has certain beliefs about how the central bank should control inflation and subsequent monetary policy. Members who want a very loose monetary policy with low rates and cheap borrowing to substantially support the economy, while settling for inflation slightly above 2%, are called “doves”. Members who prefer to see higher rates as a reward for saving and want to keep an eye on inflation are called “hawks” and will not rest until inflation is at or just below 2%.

There is usually a chairman or president who leads each meeting, needs to build consensus among the hawks or doves, and has the final say when votes are split to avoid a 50-50 tie on whether policy should be adjusted. The Chairman will deliver speeches, which can often be watched live, communicating the current monetary situation and outlook. The central bank will try to enforce its monetary policy without causing sharp swings in rates, stocks or its currency. All members of the central bank will direct their stance on the markets ahead of the policy meeting. A few days before the policy meeting, until the new policy is communicated, members are prohibited from speaking publicly. This is called the blackout period.

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