US Fed's Powell Reaffirms Tightening: "Two More Rate Hikes, Quite a Good Forecast" (Summary)

Jerome Powell, Chair of the U.S. Federal Reserve (Fed), reaffirmed on the 21st (local time) that additional interest rate hikes will continue this year to lower inflation. Contrary to market expectations of a pause after one rate hike, Powell described the "two rate hikes within the year" scenario presented in the new dot plot this month as a "pretty good guess."

[Image source=AP Yonhap News]

On the 21st (local time), Powell appeared before the House Financial Services Committee for the semiannual monetary policy hearing and stated, "The majority of Federal Open Market Committee (FOMC) members believe there will be two rate hikes this year." Earlier, on the 14th, the Fed held rates steady at the FOMC meeting but raised the year-end rate forecast (median) on the dot plot from 5.1% to 5.6%, signaling the possibility of two baby steps (0.25 percentage point rate hikes) within the year.

When asked about the possibility of two hikes this year, Powell said, "If the economy proceeds as expected, we can guess what will happen," supporting the outlook on the dot plot as a "pretty good guess." He noted that while speed was very important early in the Fed's tightening cycle, it is less so now, adding, "Going forward, it will be appropriate to raise rates at a more moderate pace." Regarding the timing of additional hikes, he repeated a general response that it will be based on incoming data.

In particular, when a lawmaker described the June FOMC's decision to hold rates as a tightening "pause," Powell immediately corrected this, emphasizing, "I have never used the word 'pause,' and I will not use it today." This was interpreted as a statement underscoring that the Fed's tightening cycle to reduce inflation is ongoing.

He also reaffirmed concerns about inflation. While noting that "inflation has somewhat eased since mid-last year," he diagnosed that "inflationary pressures remain high, and there is still a long way to go to bring it down to the 2% price stability target." Additionally, although some effects have appeared since the Fed raised rates by 5 percentage points starting in March last year, he expects it will take more time to confirm the full impact of the tightening policy.

Powell assessed the labor market as still tight, with demand exceeding supply. He stated that a strong labor market supports a strong economy. These remarks were consistent with those made during the press conference immediately following the June FOMC. Powell reiterated that to lower inflation, the economy must slow to below-trend growth and the overheated labor market must cool. When asked whether the 2% inflation target should be adjusted, he firmly dismissed the idea, saying, "There is no change to the Fed's 2% target."

Currently, the market widely expects the Fed to resume rate hikes at the next July FOMC meeting. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) futures market is pricing in nearly a 75% chance of a baby step hike in July. However, unlike the Fed's dot plot signaling two hikes this year, the rate futures market still favors a scenario of one hike followed by a prolonged pause.

On the same day, Austan Goolsbee, President of the Federal Reserve Bank of Chicago, said in a foreign media interview, "We have not yet decided how to proceed with the rate decision at the next meeting more than a month away," adding, "We need to see more signs on inflation before resuming rate hikes." Raphael Bostic, President of the Federal Reserve Bank of Atlanta, suggested in an essay that the FOMC has already done a lot and that instead of pre-planning, it should adopt a "play-it-by-ear" approach, making decisions based on the situation as it unfolds.

During the hearing, lawmakers also questioned the move to strengthen bank regulations following the March collapse of Silicon Valley Bank (SVB). Powell emphasized that nothing has been finalized yet but stressed that banks must first bolster sufficient capital and liquidity. He noted that the banking system is "sound and resilient," but the recent incident served as a reminder for the Fed to review whether its supervisory and regulatory practices are appropriate. Powell is scheduled to testify before the Senate Banking Committee on the 22nd.

Meanwhile, following Powell's hawkish remarks, the New York stock market showed broad weakness ahead of the afternoon close. The Nasdaq Composite Index, which is sensitive to interest rates and tech stocks, was trading about 0.75% lower compared to the previous session.

This content was produced with the assistance of AI translation services.