The Federal Reserve’s Chairman Jerome Powell delivered his testimony to Congress today, providing an outlook for the economy and banking system. Several other central bank members also spoke, creating a lot of headlines.
Let’s look at some key soundbites so you don’t have to watch the full three-hour video. 👇
First, in light of the recent banking failures, lawmakers asked for more details on the Fed’s plans to revise its supervision and regulatory practices. Powell’s response suggested that community banks are not the focus of the regulatory changes and that the Fed does not want to encourage further consolidation in the industry. Instead, they’re focused on ensuring regional banks and others maintain adequate funding through changes to capital requirements and other balance sheet-focused rules. 🏦
On the economy, Powell admitted that it’s holding up better than anticipated. However, inflation remains too high (and sticky). As a result, he said that most Fed officials think interest rates will need to move up further to bring prices back to their long-term 2% target. He noted that the Fed remains in a tough sport, overachieving on its employment mandate. While it’s politically difficult to say unemployment needs to rise to bring down inflation, that remains the case. But so far, there’s been little response from the labor market, suggesting rates may need to be higher for longer. 🦅
Some lawmakers raised questions about the Fed’s balance sheet size, which more than doubled during the pandemic. Powell reiterated that the Fed is running down its holdings by $1 trillion annually, letting securities roll off as they mature. They do not intend to sell assets. Regarding the Fed needing to borrow marginally more money from the Treasury, Powell noted that the Fed doesn’t consider fiscal goals when managing its balance sheet. 💧
Democratic lawmakers hammered home their concerns about the Fed’s rapid rate increase impact on the economy. Given the upcoming election, they’re concerned about unemployment rising significantly, even if they want inflation to decrease. On the Republican side, concerns over banking regulation and further tightening of credit conditions were the key topics.
Many were surprised at how cordial the discussions were, considering the last Fed Chairs to raise rates significantly received a very different reception from lawmakers. In the meantime, everyone will continue watching inflation and employment data while awaiting the timing of the next hike. 👀