Jerome
Powell,
chair
of
the
Federal
Reserve,
during
a
House
Financial
Services
Committee
hearing
in
Washington,
D.C.,
on
June
21,
2023.

Nathan
Howard
|
Bloomberg
|
Getty
Images

Federal
Reserve
Chairman

Jerome
Powell

heads
to
Capitol
Hill
on
Wednesday
with
markets
intent
on
getting
more
clarity
about
how
the
central
bank
plans
on
proceeding
with
monetary
policy
this
year.

The
past
several
months
have
seen
a
changing
dynamic
between
financial
markets
and
the
Fed
over
the
pace
and
timing
of
expected
interest
rate
cuts
this
year.
Markets
have
had
to
adjust
their
collective
view
from
a
highly
accommodative
central
bank
to
one
that’s
more
cautious
and
deliberate.

With
his
congressionally
mandated
testimony
coming
before
the
House
on
Wednesday
and
the
Senate
on
Thursday,
Powell
will
be
tasked
with
providing
a
sharper
view

and
not
rocking
the
boat
for
a
nervous
Wall
Street.

“The
question
now
for
the
market
is
to
glean
any
information
on
when
the
Fed
will
begin
employing
rate
cuts
and
how
many,”
said
Quincy
Krosby,
chief
global
strategist
at
LPL
Financial.
“He’s
not
going
to
answer
that
necessarily.
But
if
there
is
any
change,
any
nuance,
that
is
what
the
market
wants
to
see.”

Central
to
the
question
of
how
the
Fed
acts
from
here
on
out
is
its
view
on
inflation
and
how
Powell
expresses
that.
In
recent
weeks,
he
and
others
have
expressed
satisfaction
with
the
trend
in
prices
along
with

apprehension
that
risks
still
lurk
,
saying
it’s
too
early
to
ease
up
on
monetary
policy.

Markets
currently
anticipate
the
Fed
will
begin
cutting
in
June
and
enact
the
equivalent
of
four
quarter-percentage-point
cuts
in
total
this
year,
according
to
futures
market
pricing
gauged
by
the
CME
Group.
Policymakers
in
December

indicated
three
cuts

and
mostly
have
avoided
providing
a
timetable.


Mixed
signals
complicate
the
message

On
the
inflation
issue,
the
data
had
been
cooperating
for
the
most
part.

Inflation
readings
in
the
latter
part
of
2023
showed
a
clear
trend
toward
the
Fed’s
2%
target.
However,
January
brought
a
jolt,
showing
that
consumer
prices,
particularly
in
shelter
costs,

remained
stubbornly
higher

and
posed
a
threat
to
the
trend.

Powell
will
have
to
synthesize
the
recent
trends
carefully
as
he
speaks
first
to
the
House
Financial
Services
Committee
on
Wednesday,
then
the
Senate
Banking
Committee
the
day
after.

“The
message
very
much
is
not
going
to
be
‘mission
accomplished,’
but
‘we’ve
made
a
lot
of
progress,
we
anticipate
rate
cuts
are
coming,'”
said
Joseph
LaVorgna,
chief
economist
at
SMBC
Nikko
Securities.
“That
to
me
is
what
I
think
will
be
the
central
message.”

Powell’s
testimony
before
Congress
comes
at
a
ticklish
time
for
markets:
After
breaching
historic
highs,

major
stock
averages
have
sold
off

this
week
amid
ongoing
concern
about
where
rates
are
headed
and
a
suddenly
uncertain
outlook
for
a
few
of
the
Big
Tech
names
that
have
been
driving
prices
higher.

Both
conditions
are
concerning
for
policymakers.
Big
jumps
in
risk
asset
prices
could
reflect
loose
financial
conditions
that
might
cause
the
Fed
to
hold
tight
on
policy,
while
a
less
certain
environment
could
raise
fears
about
staying
too
high
for
too
long
on
rates.

Powell
“cannot
deviate
at
all
from
the
‘data-dependent,
but
we
really
want
to
cut
rates’
approach
the
Committee
has
committed
to,”
wrote
Steven
Ricchiuto,
U.S.
chief
economist
at
Mizuho
Securities.
“Sharp
swings
in
financial
conditions
can
easily
work
at
cross-purposes
to
the
Committee’s
objective:
maintaining
tight
labor
market
conditions
while
also
keeping
inflation
expectations
and
long-term
rates
well
anchored,”
he
said,
referring
to
the
policy-setting
Federal
Open
Market
Committee.


Political
concerns

There
are
also
other
dynamics
facing
Powell.
Several
economists,
including
LaVorgna,
see
labor
conditions
weakening
despite
the
apparent
strength
of
a
3.7%
unemployment
rate.
Also,

a
stunning
runup
in
cryptocurrency
prices

recently
suggests
untethered
risk-taking
that
could
indicate
too
much
liquidity
washing
around
the
system.

Indeed,
Atlanta
Fed
President

Raphael
Bostic
on
Monday
released
an
essay

in
which
he
expressed
concern
about
potential
“pent-up
exuberance”
that
could
be
unleashed
after
rate
cuts
start.

“We
don’t
think
monetary
policy
itself
is
loose,
but
the
Fed
and
Powell
have
to
wonder
about
this
nonetheless,
in
view
of
these
extant
‘remnants’
of
speculation,”
strategists
at
Macquarie
said
in
a
client
note
Tuesday.
“The
point
is
that
small
speculative
frenzies
that
come
out
of
nowhere
should
make
it
even
more
difficult
for
the
Fed
to
sound
dovish
at
this
juncture.”

Finally,
there
are
political
considerations.

Along
with
the
usual
pressure
that
comes
during
presidential
election
years,
there
have
been
calls
on
the
Hill
for
Powell
and
his
cohorts
to
start
cutting
rates.
Sen.
Elizabeth
Warren,
D-Mass.,
no
fan
of
Powell
to
start
with,
called
in
January
for
the

Fed
to
start
cutting

as
higher
rates
are
especially
painful
for
lower-income
households.

They’ll
get
a
chance
to
hash
out
the
issue
Thursday
as
Warren
is
a
member
of
the
Senate
banking
panel.

Powell
needs
to
make
“a
case
for
why
the
Fed
needs
to
address
rates
in
anticipation
of
where
inflation
is
likely
to
be
not
where
it
is
at
the
moment,”
LaVorgna
said.
“You’re
going
to
be
damned
if
you
do,
damned
if
you
don’t.
So,
I
think
you
need
a
very
solid
framework.”



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