Federal Reserve Chairman Jerome Powell appears before Congress today as part of semiannual testimony on monetary policy.
His last appearane in Congress was six months ago, in July 2022. Since then, there has been a significant shift in the US Consumer Price Index (CPI), with the driving factors moving from food and energy to higher-sticky service industries such as rent.
While lawmakers in Congress are not necessarily financial experts, they are more concerned with serving political goals. In July 2022, the focus was on how to control the rampant inflation, but this time it's different. The market mood, heightened by media hype, has shifted from reducing inflation to avoiding harm to the real economy in order to prevent a recession.
Therefore, Powell's main task is to persuade lawmakers of the need to continue raising interest rates and how to avoid dragging down other economic sectors.
The market is clearly uncertain about his stance, lacking clear direction. While the overall market has experienced a correction, there is still optimism. However, if the central bank leader stumbles in his semi-annual monetary policy testimony this week, the mood could quickly shift in another direction.
We believe Powell will focus on two points in his remarks (which should be persuasive to Congress):
1. What progress has been made in controlling inflation (and why the need for fast-paced rate hikes)
2. The economic outlook for maintaining rates at high levels (preparing for continued rate hikes until inflation is clearly resolved)
Powell's typical approach may be both firm and cautious, neither taking the lead nor being held responsible, saying what needs to be said to give lawmakers and the market space. We anticipate Powell will point out the "resilience of the real economy" while warning that inflation data has risen and the road to taming it "will be long and bumpy."
During Powell's testimony, the market may also fluctuate based on his comments at any time.
Powell will appear before two committees over two days - the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday.
It should be noted that the current House of Representatives is controlled by the Republican Party, while the Senate is controlled by the Democratic Party.
The Biden administration belongs to Democratic Party, and the ruling party is more concerned about whether economic growth and employment will be affected, in order to gain more votes.
However, the Republican Party definitely doesn't think so. They hope to find as many mistakes as possible from the ruling party, so that they can take their place. In addition, Powell may provide some clarification on the "terminal" interest rate of the Fed. Currently, the market expects the endpoint of interest rate hikes to be in the range of 5.25%-5.5%, which is about 25 basis points higher than the economic forecast in December.
Let's see their bargin.
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