Jerome Powell, Chairman of the US Federal Reserve (Fed), will deliver the Semi-Annual Monetary Policy Report and respond to questions before the House Financial Services Committee on the second day of his Congressional testimony.
On Tuesday, Powell appeared before the Senate Banking Committee and reiterated that it will not be appropriate to cut the policy rate until they gain greater confidence in inflation heading sustainably toward 2{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38}. “The most recent labor market data sent a pretty clear signal that the labor market has cooled considerably,” he added. According to the CME FedWatch Tool, the probability of the Fed leaving the policy rate unchanged in September stands at around 25{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} following this event.
Key highlights from Powell testimony before US Senate.
This section below was published as a preview of Fed Chairman Powell’s Congressional testimony at 09:00 GMT on Tuesday, July 9.
- Jerome Powell’s testimony in the US Congress will be a top-tier market-moving event this week.
- New clues on the Federal Reserve interest rate path are awaited.
- US Dollar, stock markets, and other asset classes could see big swings with the Fed Chair’s words.
Jerome Powell, Chairman of the US Federal Reserve (Fed), will deliver the Semi-Annual Monetary Policy Report and testify before the Senate Banking Committee on Tuesday. The hearing, entitled “The Semi-Annual Monetary Policy Report to the Congress,” will start at 14:00 GMT, and it will have the full attention of all financial market players.
Jerome Powell is expected to address the main takeaways of the Fed’s Semi-Annual Federal Reserve Monetary Policy Report, published last Friday. In that report, the Fed noted that they have seen modest further progress on inflation this year but added that they still need greater confidence before moving to rate cuts. “Labor supply and demand resembles period right before the pandemic, when the labor market was relatively tight but not overheated,” the publication read.
US representatives are expected to ask Powell about the interest rate path, inflation developments, and the economic growth outlook in a long Q&A session. However, they could focus on politics because of the upcoming November Presidential election, making it difficult for Powell to respond to questions.
The CME Group FedWatch Tool shows that markets price in only 25{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} probability that the Fed will leave the policy rate unchanged in September. The latest jobs report showed that US Nonfarm Payrolls (NFP) rose 206,000 in June. This reading came in above the market expectation of 190,000, but the US Bureau of Labor Statistics (BLS) announced that May’s NFP increase was revised down to 218,000 from 272,000. Additionally, the Unemployment Rate edged higher to 4.1{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} from 4{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38}, while the annual wage inflation, as measured by the change in the Average Hourly Earnings, declined to 3.9{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} on a yearly basis from 4.1{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38}.
In case Powell adopts an optimistic tone about the inflation outlook and acknowledges loosening conditions in the labor market, investors could remain optimistic about a September rate cut. The market positioning suggests that there is some room for further US Dollar (USD) weakness in this scenario. On the other hand, market participants could reassess the probability of a rate reduction in September and help the USD hold its ground if Powell downplays the gloomy labor market figures and remains cautious about the continuation of disinflation.
About Jerome Powell (via Federalreserve.gov)
“Jerome H. Powell first took office as Chair of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term. He was reappointed to the office and sworn in for a second four-year term on May 23, 2022. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System’s principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028.”
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38}.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} it usually results in higher interest rates and vice versa when it falls below 2{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38}. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
