Investors and lawmakers will have a chance to get answers this week on what the Federal Reserve’s roadmap for bringing inflation under control looks like in the months ahead.
Just one week after the central bank opted to skip a rate hike with inflation still well above its 2% target, Federal Reserve Chairman Jerome Powell is set to appear before the House Financial Services Committee Wednesday and the Senate Banking Committee Thursday as part of a mandated semi-annual report on monetary policy.
Although the move to hold the benchmark interest rate steady in June was widely expected, investors were surprised when the Federal Open Market Committee telegraphed it was considering not one, but two more rate hikes this year following one of the swiftest hiking campaigns in history.
Expect lawmakers to focus on why officials opted to drag additional tightening out by holding in June. Additionally, members of Congress will likely question what metrics Fed officials will use to determine the effectiveness of their previous 10 straight rate hikes.
Following the June meeting, the latest median forecast shows officials now see the federal-funds rate hitting 5.6% by the end of the year, up from an expected 5.1% in March, according to the Fed’s updated Summary of Economic Projections. This implies the Fed could implement two more quarter-point boosts from the current level of 5% to 5.25%.
“Nearly all committee participants view it as likely that some further rate increases will be likely this year,” Powell said during the June 14 press conference.
Several Fed officials portrayed skipping a rate increase as a prudent move that would provide the central bank an opportunity to assess how the tightened monetary policy was affecting the overall economy. Powell echoed that characterization last week, but noted more progress on reining in inflation is needed.
“If you look at the core PCE inflation overall, looking at it over the last six months, you’re just not seeing a lot of progress,” Powell said. PCE, the Fed’s preferred inflation gauge, is an index of personal-consumption expenditures that showed annual headline inflation hit 4.4% in April. Core PCE, which excludes food and energy prices, climbed 4.7% on an annual basis in April. The other major inflation measure, the consumer price index, recorded price growth slowing to a 4% annual pace in May.
“We want to see it [inflation] moving down decisively. We’re going to get inflation down to 2% over time. We want to do that with the minimum damage we can to the economy, of course, but we have to get inflation at 2%,” Powell added.
That’s why Fed officials opted for both a higher rate by the end of this year, and a moderation in the pace with which the central bank is moving, Powell noted.
Whether members of Congress agree that was the right call will be on display this week. Powell’s testimony to the House starts at 10 a.m. Eastern Wednesday.
Write to Megan Leonhardt at megan.leonhardt@barrons.com
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