Fed’s Powell reiterates inflation data still doesn’t support rate cuts

US Federal Reserve President Jerome Powell admitted Wednesday before the House Finance Committee that he has “some confidence” that inflation is approaching 2%But reported more positive data than provide you with the security you need before you lower interest rates. “The data for the first quarter of this year do not support this high confidence. However, the most recent inflation data show modest progress,” he acknowledged.

So, he recalled that does not expect it will be “appropriate” to cut the base rate until there is greater certainty that inflation is approaching the 2% target. In that sense, Powell acknowledged that he has “some confidence” that this is already happening, but not yet enough. “I have some confidence in that (that inflation is falling to 2%). I think we’ve seen that in recent years. The question is whether we have enough confidence that inflation is falling steadily to 2%. I’m not ready to say that yet,” he said. Consequently, Powell insisted that cutting rates too early could jeopardize inflation control, while cutting rates too late could put “undue” pressure on GDP and employment.

The dollar’s ‘keeper claims that Monetary policy decisions will continue to be made on a meeting-by-meeting basis. given the convergence of risks in achieving the Fed’s employment and inflation targets. In any case, Powell made it clear that it was not necessary to wait for inflation to fall to 2% to cut rates, given that this variable has “a certain amount of inertia.” Likewise, he ruled out the possibility of offsetting a prolonged period of inflation above 2% with another rate below that, to get to an average of 2% over twelve months. For his part, he recalled that an “unexpected weakening” in employment would be a “casus belli” to reduce the price of money.

BASEL III

The Fed president was also questioned about the Basel III criteria for bankingand assured that the process will move forward “pretty soon” and that stakeholders should have time to comment on the “material changes” that were made. “My view, and the view of several (Federal Open Market Committee) members, is that the most appropriate course of action would be to publish a new proposal along with the results of the quantitative impact study, resubmit it for comment, and spend some time analyzing them before finalizing the regulation,” he explained. “These things take a long time to write, and we’re going to do a good job of it,” he concluded.

Powell defended the application of the Basel III proposal even if it is “partially” rewritten and US banks are already well capitalized, given that will create a state of “broad international parity” through comparable rules. to other countries. The rules of Basel III, an international agreement that emerged from the 2008 financial crisis to prevent future bank failures, will increase the capital requirements that financial institutions must set aside for anti-crisis “buffers.” However, those most critical of the initiative say it will reduce the amount of credit in circulation and hurt economic growth.

BALANCE SHRINKING AND MACROECONOMICS

Powell also addressed Since June, the balance sheet has been shrinking, and has now shrunk by $1.7 trillion. (€1.57 trillion) of mortgage-backed and Treasury securities purchased during the pandemic to stabilize the economy, and warned that “there is still a lot of work to do.” “We have slowed down to get as far as possible without creating friction and unrest that could force us to stop this reduction prematurely. If we had slowed down a little, we could have gone further,” the central bank chief said.

Then, similar to what he did yesterday during his Senate testimony, Powell pointed out that May Personal Consumption Expenditure Price Index (PCE), the Fed’s preferred statistic for monitoring inflation, amounted to 2.6%In addition, long-term inflation expectations appear to remain “well anchored.” Powell noted that economic activity has slowed but is still growing at a “solid pace,” while the labor market remains “strong” but not “overheating.” Likewise, nominal wage bill growth would have slowed last year.