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Long Road Ahead: The Fed's Persistent Battle Against High Inflation

Jerome Powell, Chair of the Federal Reserve, acknowledges the ongoing struggle to curb inflation in his latest testimony.

Jerome Powell
Jerome Powell

Jerome Powell's Message to the House Financial Services Committee

Jerome Powell, Chair of the Federal Reserve, declared on Wednesday during a prepared testimony for the House Financial Services Committee that the fight to bring inflation back to its 2% target still has considerable ground to cover.

Recent Progress and Future Outlook

Despite recent inflation rates falling from a 7% peak last year to 4.4% as of April, Powell underscored that the path to reducing inflation back to 2% is still long and challenging. In light of the Federal Open Market Committee's decision to maintain the interest rates, Powell noted that the majority of participants foresee the necessity for further rate hikes by year-end.

Investor Expectations and Fed's Commitment

Investors generally anticipate the resumption of rate increases at the Fed's July meeting, but there are doubts about the likelihood of additional hikes beyond this meeting. Powell aimed to reassure the predominantly Republican House committee of the Federal Reserve's commitment to mitigating the burdens of high inflation, emphasizing their unwavering dedication to achieving the 2% inflation target.

Upcoming Testimonies and Economic Impacts

Powell's testimony before the House committee marks the first of his two appearances on Capitol Hill this week, as he is scheduled to present his biannual reports to federal lawmakers. The Federal Reserve Chair will also address the Senate Banking Committee on Thursday. In his testimony, Powell painted a picture of the ongoing debate among policymakers, balancing robust U.S. labor market conditions and modest economic growth against potential yet-to-be-felt impacts of quick Federal Reserve rate increases on the overall economy.

Effects on Interest-Rate–Sensitive Sectors and Banking Stress

Powell pointed out the visible impacts of their policy tightening on interest-rate-sensitive sectors such as housing. However, he cautioned that it would take time to fully comprehend the effects of monetary restraint, especially on inflation. This uncertainty makes it increasingly difficult for officials to judge if the existing interest rate hikes are adequate to meet their inflation goals, or if further economic restraint is needed. He also pointed to banking sector stress creating potential challenges for households and businesses, the consequences of which remain uncertain.

The Prudent Step: No Rate Hike in Recent Meeting

In the context of the rapid five-percentage point rate hikes approved by the Fed since March 2022, the decision not to increase rates in the most recent meeting was seen as a "prudent" step. This course of action, according to Powell, allows the Committee to evaluate additional information and its implications for future monetary policy.