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Federal Reserve Chairman Jerome Powell is in the spotlight this week as he testifies before Congress. Investors will watching closely as they look for signs of future rate hikes.
Powell is expected to testify before the Senate Banking Committee on Tuesday morning and before the House Financial Services Committee on Wednesday. During this testimony, he will be tasked with convincing lawmakers that a central bank can bring down inflation without destroying the US economy.
Powell will have good news: When he last addressed Congress in June, inflation was at its highest level in 40 years, approaching 9%. Today, that rate has fallen to 6.4%, although it remains well above the Fed’s annual target of 2%. Inflation year on year rejected for seven consecutive months.
However, some in Congress were openly critical the Fed’s efforts to cool the economy through painful interest rate hikes. Investors will also be on their toes – hawkish language or even Powell’s aggressive tone could lead to market volatility.
Here are three things to look out for in this week’s testimony:
The state of the economy
Is the US economy headed for recession or not? This question worries most economists and investors.
Many Fed officials have acknowledged that they themselves are baffled by current economic data: the data show a booming labor market, high house prices and strong US consumers, but inflation has stalled and prices remain high.
The economy appears to have become immune to a string of large interest rate hikes from the Fed, and investors are waiting to see how long it can hold out.
“The inflationary forces currently affecting the US economy are a complex mixture of temporary and longer-term elements that defy simple … explanation,” Fed Chairman Philip Jefferson said at a conference late last month.
So how will Powell answer questions about what defies “simple” explanation? We’ll find out soon.
The most relevant information investors are looking for is how high the Federal Reserve will raise interest rates at the end of this month and whether central bank officials expect to reverse their painful rate hikes in the near future.
Former Treasury Secretary Larry Summers told CNN on Monday that the Fed will likely have to return to bigger rate hikes to stave off inflation as the economy continues to grow.
“I don’t think there is any doubt that we don’t have inflation on the safe slippery slope somewhere near 2% yet. [Fed target] level,” Summers said. “And until the Fed is confident about that, it will tighten, not loosen.”
Summers said his best guess would be to raise the Fed funds rate from its current range (4.5% to 4.75%) to 5.5%, but noted that he “wouldn’t be surprised” if it hit 6%, considering the uncertainty. in economics.
“Hope for the best, but prepare for the worst, I think that’s the right advice,” Summers said.
Some representatives of the Fed agree with this. On Saturday, San Francisco Federal Reserve President Mary Daly said she believes there is still more to be done to bring inflation down. “Putting this episode of high inflation behind us will likely require further policy tightening over a longer period of time.”
So will Powell step in and signal that more rate hike on the way?
The United States is still far from the Federal Reserve’s 2% inflation target, and economists warn that it could take years to reach that target as price increases appear to crab instead of deflation.
The severity of inflation has led some economists to question whether 2% is still the right target.
“The road to inflation targeting may be longer than anticipated, especially given limited progress on the Fed’s goal of creating some easing in labor market conditions,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors.
Powell has been unwavering in his commitment to that 2% goal, but some lawmakers are expected to ask him if he’ll settle for a potential stock market crash or a slow economy to achieve that goal.
JPMorgan Chase CEO Jamie Dimon, who loves reporting economic weatheralso baffled by the state of the US economy.
Asked about his economic prospects Bloomberg Television In an interview on Monday, he presented a menu of options. “We can still make a soft landing,” he said. “A slight recession is possible, a stronger recession is possible”, He said.
The remarks seem to hit the nose of the overall economic outlook. Economists, business leaders, investors, and even Fed officials aren’t entirely sure what’s going on.
Even the Oracle of Omaha himself, Warren Buffett, recently wrote in his annual letter to Berkshire Hathaway shareholders that he and his business partner Charlie Munger “firmly believe that short-term economic and market forecasts are more than worthless.”