Fed’s Powell reiterates that inflation data still do not support a rate cut

10 ()

US Federal Reserve Chairman Jerome Powell told the House Finance Committee on Wednesday that he has “some confidence” that inflation is heading toward 2%, but called for more positive data to give him the necessary security before lowering interest rates.

“The data for the first quarter of this year do not support this increased confidence. However, the most recent readings on inflation show some modest progress,” he acknowledged.

He has thus recalled that he does not expect it to be “appropriate” to cut the reference rate until there is greater certainty that inflation is converging with the 2% target. In this regard, Powell has acknowledged that he has “some confidence” that this is already happening, but not yet enough.

“I have some confidence in that. [en que la inflación está cayendo al 2%]”I think we’ve seen that in recent years. The question is whether we are confident enough that it is steadily coming down to 2%. I’m not ready to say yet,” he said.

Powell has therefore insisted that cutting rates too soon could jeopardise inflation control and that doing so too late could weigh “unduly” on GDP and employment.

The guardian of the dollar has maintained that monetary policy decisions will continue to be made “meeting by meeting” given the convergence of risks when pursuing the Fed’s objectives in terms of employment and inflation.

In any case, Powell has been clear that it will not be necessary to wait for inflation to fall to 2% to lower rates given that this variable has a “certain inertia.”

He also ruled out compensating for a prolonged period of inflation above 2% with another below this figure to obtain an average of 2% over twelve months. He also recalled that an “unexpected weakening” of employment would constitute a ‘casus belli’ for lowering the price of money.

BASEL III

The Fed chairman was also questioned about the Basel III criteria for banking, and said that the process would move forward “quite soon” and that interested parties should have time to comment on the “material changes” that are made.

“In my opinion, and in that of several members of the Committee, [Federal de Mercado Abierto]”The most appropriate thing to do is to publish the new proposal together with the results of the quantitative impact survey, send it back for comments and spend some time analysing them before finalising the regulation,” he explained. “Drafting these things takes a long time, and we are going to do it well,” he summed up.

Powell has defended the implementation of the Basel III proposal, even if it is “partially” rewritten and American banks are already well capitalized, given that it will create a state of “broad international parity” through regulations comparable to those of other countries.

The rules of Basel III, an international agreement that emerged in the wake of the 2008 financial crisis to prevent future bank failures, will raise the capital requirements that financial institutions should allocate to anti-crisis “buffers.” However, critics of the initiative point out that this will reduce the credit in circulation and negatively affect growth.

BALANCE SHEET AND MACROECONOMICS

Powell also addressed the balance sheet reduction that began in June, which has so far reduced by $1.7 trillion (€1.57 trillion) the holdings of mortgage and Treasury securities acquired during the pandemic to stabilise the economy, and warned that “there is still a long way to go”.

“We have slowed down the pace with a view to going as far as possible without creating friction and disruption that could cause us to stop tapering prematurely. Going a little slower might allow us to go further,” the central banker said.

Then, similarly to what he did in his appearance yesterday in the Senate, Powell indicated that the May reading of the personal consumption expenditures (PCE) price index, the Fed’s preferred statistic for monitoring inflation, was 2.6%, equivalent to a “modest advance.” In addition, long-term inflation expectations appear to remain “well anchored.”

Powell said economic activity had slowed but was still growing at a “solid pace,” while the labor market remained “strong” but not “overheated.” Nominal wage growth had also moderated over the past year.