Where Are We Left After FED’s Powell Testimony?

FED chairman Powell sounded less hawkish on Wednesday, but raised the game on Thursday, leaving the USD bullish

Skerdian Meta•Friday, June 23, 2023•2 min read

Markets are extremely sensitive to the FED policy right now, and this week’s testimony by Jerome Powell at the US Congress took center stage, apart from the rate hikes by the Swiss National Bank and the Bank of England. Federal Reserve Chair Jerome Powell recently addressed several key points regarding Federal Reserve policy and monetary outlook. Here is a summary of his statements:

Reverse Repo Facility and Balance Reduction: Powell mentioned that the reverse repo facility has been decreasing since March but doesn’t fully account for the decline in bank deposits. He noted that the reduction of the balance has been orderly and doesn’t anticipate reserves becoming scarce in the near future.
Tightening Credit as an Alternative to Rate Hikes: Powell stated that tightening credit conditions could serve as a substitute for a rate hike. He indicated that his forecasts align closely with the committee’s predictions. The majority of the committee believes that two more rate hikes are necessary before the year concludes.
Cautious Approach to Policy Adjustment: Powell highlighted that the Federal Reserve chose to proceed more slowly recently, demonstrating a cautious approach to policy adjustments. He emphasized the need to be careful in rate normalization to avoid going overboard. Powell expressed expectations of decreasing inflation and a gradual cooling of the labor market. He also acknowledged the need for progress in services inflation and reiterated the long path ahead to achieve monetary policy targets.
Inflation and Unemployment Outlook: Powell sees a path for inflation to continue falling with minimal impact on unemployment. He expects a slight increase in the unemployment rate but hopes that the majority of labor market loosening will occur through means other than unemployment.
Monetary Policy Effectiveness: Powell acknowledged that there is no consensus on the duration it takes for monetary policy to impact the economy, but he approximated it to be around a year. He refuted the notion that monetary policy is becoming less effective and reaffirmed the Fed’s commitment to achieving 2% inflation over time.
Rate Hike Outlook: Powell revealed that the Federal Open Market Committee (FOMC) broadly agrees that it will be appropriate to raise rates again this year, with the possibility of two more rate hikes. He clarified that the decision to keep rates unchanged was intended to allow for more time in the decision-making process, indicating a continued cautious approach.

These statements provide insights into the Federal Reserve’s current stance on policy, inflation expectations, and the gradual normalization of interest rates. It’s important to note that the actual decisions and actions of the Federal Reserve may differ from the information provided here, as circumstances and economic conditions can change.

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Skerdian Meta

Lead Analyst

Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.