Macro

Fed Chair Powell Testifies on Inflation, Unemployment Risks Before House Panel

Powell signals no rate cut in July; markets now expect potential cuts in September at 5.25%-5.50% range.

By Mackenzie Crow

7/10, 09:32 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
Bitcoin / US Dollar
article-main-img

Key Takeaway

  • Fed Chair Jerome Powell testifies before the House Financial Services Committee, following his Senate appearance discussing economic growth and inflation risks.
  • Powell highlights the dual risk of rising unemployment and persistent inflation, stressing cautious policy adjustments to avoid economic damage.
  • Investors are keen on any hints about future rate cuts, though a July cut is seen as unlikely; bank oversight and commercial real estate risks may also be discussed.

Powell's Testimony and Market Reactions

Federal Reserve Chair Jerome Powell's testimony before the U.S. House Financial Services Committee on Wednesday followed his appearance before the Senate Committee on Banking, Housing, and Urban Affairs on Tuesday. Powell's remarks highlighted the dual risks facing the U.S. economy: rising unemployment and persistent inflation above the Fed's 2% target. He emphasized the delicate balance the Fed must maintain, stating, "Reducing policy restraint too late or too little could unduly weaken economic activity and employment."

Investors were keenly listening for any hints on when the Fed might begin to cut rates. However, Powell's comments suggested that a rate cut in July is unlikely, with markets now expecting potential cuts in September. The Fed's overnight borrowing rate currently sits at 5.25%-5.50%, the highest in 23 years, following 11 consecutive hikes aimed at curbing inflation.

Economic Growth and Inflation Concerns

Powell acknowledged that while the U.S. economy remains strong, with a robust labor market, there has been some recent cooling. He noted that inflation, as measured by the Fed's preferred personal consumption expenditures price index, was at 2.6% in May, down from a peak above 7% in June 2022. "After a lack of progress toward our 2 percent inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress," Powell said.

Despite these improvements, Powell stressed that elevated inflation is not the only risk. He highlighted the importance of maintaining "the operational independence that is needed" for the Fed to effectively manage monetary policy. Recent data has shown a slight increase in the unemployment rate and a deceleration in GDP growth, with both the manufacturing and services sectors reporting contraction in June. However, Powell maintained that "the U.S. economy continues to expand at a solid pace," driven by robust private domestic demand and consumer spending.

Market Reactions and Future Outlook

Markets remained relatively calm following Powell's testimony, with major U.S. stock indexes roughly flat and the dollar and bond yields slightly higher. Bitcoin experienced a brief knee-jerk bounce but quickly returned to trading just above $57,000. Powell's balanced remarks on inflation and economic risks left traders with mixed signals. "We do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent," Powell told the committee.

The odds of a rate cut in September have edged higher, with CME FedWatch indicating a 75% chance of one or more cuts, up from 50% a month ago. Upcoming economic data, including the June Consumer Price Index (CPI) report, will be crucial in shaping market expectations. The CPI is expected to show a 0.1% rise in prices last month, with core prices (excluding food and energy) rising 0.2%. Any surprises in these figures could significantly alter the outlook for rate cuts.

Street Views

  • Jerome Powell, Federal Reserve Chair (Neutral on U.S. economic growth and policy):

    "Reducing policy restraint too late or too little could unduly weaken economic activity and employment."