Federal Reserve Chair Jerome Powell testifies before congressional lawmakers this week, starting Wednesday morning with the House Financial Services Committee — just one week after the central bank paused its most aggressive rate-hiking campaign in decades.
The Fed held its key lending rate steady at a range of 5-5.25%, but most officials hinted that two more quarter-point rate hikes might be necessary this year, according to the Fed's latest set of economic forecasts. Indeed, just days after the decision, two Fed officials called for more increases, citing persistent inflationary pressures.
The central bank is in a pivotal moment in its fight against inflation, which remains well above the Fed's 2% target, and investors will be attentive as to how the influential Fed chair interprets economic data as hints for future policy moves.
"Powell's remarks during the next two days ... are likely to move markets," wrote José Torres, senior economist at Interactive Brokers, in an analyst note. "Powell may seek to reinforce comments from Fed Governor Christopher Waller and Richmond Fed President Thomas Barkin, who recently stated that persistent core inflation illustrates the central bank's need to maintain a hawkish stance against price increases."
Some Democrats have criticized the Fed for its rapid rate increases, fearing job losses if the central bank overdoes it. Their criticism intensified when stress in the regional banking sector emerged this spring, which prompted some of them to call for the Fed to suspend rate increases in May. The Fed hiked again that month.
About that pause
Not surprisingly, the Fed's pause was cheered by some Democrats.
"With inflation on the decline and more than 13 million jobs created since President Biden took office, pausing rate hikes is firmly in keeping with the Fed's dual mandate," Rep. Brendan Boyle, a Pennsylvania Democrat, said in a release.
Meanwhile, Republicans have frequently depicted inflation as the result of excessive fiscal spending under Biden, though the reasons behind stubborn inflation is more complex than that.
Powell will try to quell Democrats' concerns over the Fed inducing more job losses than necessary and reassure Republicans that the central bank remains committed to fighting inflation. Former US vice president and Republican presidential candidate Mike Pence has called for scrapping the Fed's employment mandate entirely.
Financial markets see a roughly 77% chance the Fed will hike rates by another quarter point in July, according to the CME FedWatch Tool.
A new report from Moody's Investors Service released Tuesday showed that "monthly growth in core prices remains broad-based" and that "consumer spending remains buoyed by the strong job market."
"These traits will keep additional rate hikes in the cards," said Madhavi Bokil, a senior vice president at Moody's Investors Service and one of the main authors of the report.
Retail spending rose last month, mostly driven by higher-income consumers, and employers added a robust 339,000 jobs in May. The economy still has momentum and minutes from the Fed's meeting earlier this month will show if economists at the central bank still think there will be a recession later this year. Those minutes will be released in early July.
What Fed officials decide during their July 25-26 meeting depends on what economic indicators show in the coming weeks, but it's unlikely they'll learn anything new. Still, Powell said holding rates steady was a "prudent" move, given that research shows that it takes at least a year for rising interest rates to trickle through to the broader economy. The Fed began lifting rates in March 2022.
The Fed has already published Powell's semiannual report to Congress, which includes mostly what Powell and the post-meeting statement communicated earlier this month. In addition to that, the report also details labor market conditions across demographic groups, the status of banking stresses, and an update on the Fed's emergency lending to banks.