Jerome Powell Speech: Fed Chair says removing restrictive stance of policy could begin this year


Federal Reserve Chairman Jerome Powell presents the Monetary Policy Report and responds to questions before the Senate Banking Committee.

Main takeaways from Powell's Q&A session in Senate

"If the economy does as expected, we think carefully removing the restrictive stance of policy will begin over the course of this year."

"We are working hard to develop a new rule book for supervision, will involve earlier, more effective interventions."

"Surge-pricing works both ways, in slow periods prices go down."

"We need to give companies freedom to set prices."

"The Fed is independent, and the way we do that is by staying out of political issues, like immigration policy."

"When rates are normalized, underlying housing shortage will still put upward pressure on prices."

"I believe we will have a consensus on capital proposal, we are in process of digesting comments, making appropriate changes."

"We are not at the stage of making a decision on reproposing Basel 3."

"Our job is to restore price stability, that's what we are doing."

Powell told the House Financial Services Committee on Wednesday that incoming data will determine when they will start reducing the policy rate and repeated that they would like to have greater confidence inflation will move sustainably toward 2% before taking action. Commenting on the economic outlook, Powell noted that there was no reason to think the economy was "in or facing a significant near-term risk of recession."

The benchmark 10-year US Treasury bond yield declined to 4.1% in the American session on Wednesday and the US Dollar (USD) suffered large losses against its major rivals. According to the CME FedWatch Tool, markets are currently pricing in a nearly 90% probability of a rate cut in June.

US Dollar price this week

The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the weakest against the Japanese Yen.

  USD EUR GBP CAD AUD JPY NZD CHF
USD   -0.44% -0.59% -0.30% -0.87% -1.39% -0.70% -0.19%
EUR 0.44%   -0.15% 0.14% -0.43% -0.94% -0.28% 0.26%
GBP 0.59% 0.16%   0.27% -0.28% -0.79% -0.11% 0.41%
CAD 0.30% -0.12% -0.29%   -0.56% -1.09% -0.42% 0.12%
AUD 0.87% 0.43% 0.28% 0.57%   -0.50% 0.15% 0.67%
JPY 1.37% 0.91% 0.72% 1.06% 0.46%   0.63% 1.17%
NZD 0.72% 0.28% 0.12% 0.42% -0.16% -0.66%   0.53%
CHF 0.19% -0.25% -0.41% -0.12% -0.69% -1.21% -0.52%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

 


This section below covers highlights from Fed Chairman Powell's prepared remarks and the Q&A session on the first day of his testimony. 

Main takeaways from Powell's Q&A session in the US House

"Rate cuts will depend on path of the economy."

"Incoming data will determine when rate cuts begin."

"We would like to have more confidence on inflation; we have some confidence but want more."

"Let's see a little bit more data so we can become confident."

"Strength of economy and labor market means we can approach that carefully, thoughtfully."

"Pandemic may have changed in a sustained way how we target inflation."

"We are seeing continued solid growth, which should continue."

"No reason to think the economy is in or faces significant near-term risk of recession."

"I don't think possibility of recession is elevated right now."

"So far we have economy growing at solid pace, labor market still tight and strong."

"Inflation has come down sharply."

"These are very attractive conditions we want to continue."

"I think we can achieve a soft landing."

"We are using our tools to keep a strong labor market and strong growth while making progress on inflation."

"We are on a good path so far in being able to get there."

"We are making sure banks with commercial real estate sector exposure can manage any losses."

"This fallout will last over next several years."

"Our Fed supervisors are engaged with small and medium-sized banks on their exposure risks."

"Immigration and labor force participation both contributed to strong economic growth we had last year."

"Silicon Valley Bank's failure was due to a too-concentrated funding structure."

"We are not climate change policymakers."

"We are starting very carefully with large institutions on their climate exposure; not for imposing it on small banks."

"Compensation incentives were not a main driver of Silicon Valley Bank's failure."

"Climate change is real and poses risks over the longer term."

Jerome Powell, Federal Reserve Chaiman, will deliver a key speech today in front of Senate

Highlights from Powell's prepared statement

"It will likely be appropriate to begin dialing back policy restraint at some point this year."

"Policy rate likely at its peak for this cycle."

"The Economic outlook is uncertain; ongoing progress to 2% inflation is not assured."

"We will carefully assess incoming data, evolving outlook, balance of risks."

"Risks to both cutting rates too early and too fast as well as too late or too little."

"The labor market remains relatively tight."

"Fed’s restrictive stance is putting downward pressure on economic activity and inflation."

"Labor demand still exceeds supply; nominal wage growth has been easing."

"Risks to achieving dual goals moving into better balance."

"While inflation is still above 2%, it has eased substantially."

"The economy has made considerable progress over past year on dual mandate."

Central banks FAQs

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

About Jerome Powell (via Federalreserve.gov)

"Jerome H. Powell first took office as Chair of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term. He was reappointed to the office and sworn in for a second four-year term on May 23, 2022. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028."

Interest rates FAQs

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

 

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