Fed Is Focused On 2% Inflation Goal Despite June Pause In Interest Rate Hikes, Powell Tells Congress

The level of interest rates is “different to the speed at which we move,” Fed Chair Jerome Powell told the House Financial Services Committee Wednesday, adding that the decision to pause in June was deemed appropriate in view of how high and quickly the Fed hiked interest rates in the last year.

Investors currently place a 79% probability on a 25-basis-point Fed rate rise in July, up from 62% last week, according to the CME Group FedWatch Tool.

Powell Sticks To 2% Inflation Target

U.S. Rep. Nydia Velazquez (D-New York), a committee member, expressed concern about the impact of the Federal Reserve’s policies on low-income individuals and the availability of credit to small businesses. Powell replied that the Fed’s mission of fighting inflation benefits all Americans, especially those on fixed incomes. He underscored the Fed’s commitment to returning inflation to the 2% target in order to support the economic well-being of lower-income communities.

U.S. Rep. Ritchie Torres (D-New York) questioned whether prioritizing the inflation goal would significantly compromise full employment objectives.

Powell said the Fed should prioritize the 2% inflation goal now, as inflation is far from that target. Answering a question as to whether high interest rates will be the new normal, Powell said it’s really hard to know.

Fed To Consider Capital Requirements After Regional Bank Crisis

U.S. Reps. Andrew Garbarino (R-New York), Young Kim (R-California) and Byron Donalds (R-Florida) questioned the need for increases in bank capital requirements.

A 1 percentage point increase in capital requirements could result in a 0.6 percentage point reduction in GDP, according to a Basel Committee study, Garbarino said.

Powell acknowledged a trade-off between safety and soundness in setting capital requirements but emphasized the net positive impact of previous capital hikes. He expressed support for completing the rollout of Basel III, an international capital requirement, and said U.S. banks have remained competitive despite previous increases in capital requirements.

Other Topics: The Dollar, Climate Change, Quantitative Tightening, CBDCs

U.S. Rep. Vicente Gonzalez (D-Texas) expressed worries about the dollar’s global significance, and Powell said the Federal Reserve does not particularly target a level for the dollar, which is considered among other factors in overall financial conditions.

When asked about whether policies to address climate change should be handled by Congress, Powell responded by affirming the Federal Reserve’s limited scope in dealing with climate change issues.

U.S. Rep. Mike Flood (R-Nebraska) voiced worries about the Federal Reserve’s balance sheet, specifically how it quickly grew by $300 billion during the banking crisis in March, reversing six months of unwinding.

Powell acknowledged the concern and said the balance sheet was decreasing at a rate of $2 trillion per year, which was quicker than past scenarios. When asked about the best target, Powell said the goal is to have a lower balance sheet without running out of reserves.

U.S. Rep. Zach Nunn (R-Iowa) asked about the Federal Reserve’s position on central bank digital currency (CBDC). Powell emphasized the Fed will not provide individual accounts and that any future CBDC will be distributed through commercial banks.

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