Fed Chair Powell Foresees Higher Interest Rates to Tackle Inflationary Pressure, Congressional Testimony Reveals Concerns over Bank Regulations, Job Market

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In a recent statement, Jerome Powell, the Federal Reserve Chair, emphasized the intention of policymakers to raise interest rates in order to curb US economic growth and manage inflationary pressures.

This declaration comes in the wake of the Federal Reserve’s decision to maintain existing interest rates during their meeting last week.

“Earlier in the process, speed was very important,” Powell said Wednesday in testimony before the House Financial Services Committee, referring to the pace at which officials lifted rates over the past year.

“It is not very important now.”

Powell also acknowledged the possibility of continuing to raise interest rates in the upcoming months; however, he emphasized that the pace of these increases would be more measured. He made this statement while responding to inquiries from lawmakers regarding the Federal Reserve’s plans. Powell further stated that the timing of future rate hikes would hinge on the analysis of incoming economic data, underscoring the data-driven nature of the decision-making process.

In response to Powell’s warning about interest rates, the US stock market experienced a decline, defying expectations that the Federal Reserve was nearing the conclusion of its tightening cycle. Traders in the swaps market cautiously adjusted their pricing, with the likelihood of the Fed increasing its policy rate by a quarter point next month remaining above 80%.

During the recent meeting of the Federal Open Market Committee, the series of interest rate hikes, which had been in motion for 15 consecutive months, came to a halt. As a result, interest rates were left within the range of 5% to 5.25%. However, Fed officials projected that rates would climb to 5.6% by the year’s end, based on their median estimate. This projection implies the possibility of two additional quarter-point hikes, driven by persistent inflationary pressures and the robustness of the labor market.

Lawmakers directed their focus towards the Federal Reserve’s plans to bolster supervision and regulation for both regional and large banks, prompted by a series of bank failures earlier this year. When questioned about this matter, Powell clarified that the Fed board had yet to vote on any changes to bank rules, but the staff had been informed about potential adjustments that are currently being considered. Powell emphasized the substantial capitalization of major US lenders, highlighting the need for caution to avoid negatively impacting the business models of smaller banks.

This week, Powell is making his appearance on Capitol Hill for the semi-annual monetary policy testimony, marking the first time since early March that he has publicly answered questions from Congress. Additionally, he is scheduled to provide testimony before the Senate Banking Committee on Thursday.

In a separate hearing, Fed governors Philip Jefferson and Lisa Cook expressed the view that any updates to bank regulations should be tailored to the size of each institution. They both raised concerns about the consolidation trends observed among lenders and underscored the significance of smaller financial institutions in serving low- and moderate-income communities.

“As we think about capital requirements, I will always be thinking about that trade-off between making banks more resilient and sound and credit availability,” Jefferson said at a Senate Banking nomination hearing.

In his prepared remarks, Powell said Fed officials “understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2% goal.”

“Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year,” he added.

“Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions.”

Powell’s prepared comments during the testimony closely mirrored his statements made during the post-meeting press conference last week. During that press conference, he conveyed the committee’s belief that it was necessary to moderate the speed at which interest rates were being increased, considering the aggressive nature of the hiking undertaken over the past four decades. Furthermore, recent bank failures were identified as potential factors that could tighten credit conditions.

Despite this moderation, Powell emphasized that a significant majority of the committee projected the necessity of higher interest rates in order to rein in inflation. This stance reflects the committee’s ongoing concern about the persistent upward pressure on prices in the economy. The Federal Reserve remains committed to striking a delicate balance between ensuring stable economic growth and addressing the challenges posed by inflationary pressures.

“We’re moderating that pace much as you might do if you were to be driving 75 miles an hour on a highway, then 50 miles an hour on a local highway,” Powell told lawmakers.

“And then as you get closer to your destination, as you try to find that destination, you slow down further.”


The Federal Reserve officials have expressed disappointment over the sluggish decline in inflation in recent months, prompting them to aim for a period of below-trend growth to alleviate the pressure on prices.

During the latest meeting of the Federal Open Market Committee (FOMC), there was an upgrade in the outlook for economic growth and the labor market in 2023.

However, the committee now anticipates a rise in the unemployment rate to 4.5% in the coming year.

Notably, Federal Reserve Chair Jerome Powell has faced criticism from some Democrats who argue that his aggressive interest rate hikes pose a risk of significant job losses.

Senator Elizabeth Warren, for instance, has warned about the potential consequences of such policies on millions of people.

In his prepared remarks, Powell described the labor market as “very tight,” despite the May increase in the unemployment rate to 3.7%.

He highlighted signs indicating that supply and demand in the labor market were gradually aligning for better balance.

Moreover, Powell referenced the semi-annual report released by the Fed to Congress on Friday, which characterized tighter credit conditions in the United States following the bank failures that occurred in March.

This assessment underscores the potential impact of these failures on the overall credit landscape in the country.

“The economy is facing headwinds from tighter credit conditions for households and businesses, which are likely to weigh on economic activity, hiring, and inflation,” he said.

“The extent of these effects remains uncertain.”

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