Interest Rates Are Expected To Rise According to Powell

Federal Reserve Chair Jerome Powell testified before Congress, stating that due to U.S. inflation surpassing the target, it is likely that more interest rate hikes will occur this year. However, Powell did not provide any specific details regarding the timing of these moves.

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Powell mentioned that "nearly all" participants in the Federal Open Market Committee (FOMC) expect it to be appropriate to raise interest rates further by the end of the year. He emphasized that the decisions will be made based on incoming data, its implications for the economic outlook, inflation, and the balance of risks.

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During his press conference last week, Powell referred to the upcoming FOMC meeting as a "live meeting," leading many economists to anticipate a rate increase. However, the timing of subsequent rate hikes becomes more uncertain after the July meeting.

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According to derivatives markets, there is approximately an 80% chance of a 25 basis point rate hike after the July meeting. The odds of a second hike at any of the remaining three meetings of the year are below 20%. Traders predict the first rate cut to take place early next year.

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At the most recent meeting, the Fed decided to maintain its policy rate within a range of 5%-5.25%. This pause followed a series of rate hikes in the past 15 months.

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Powell explained that the decision to hold the target range steady was driven by the need to assess additional information and its implications for monetary policy. The Fed is monitoring the lagged effects of previous rate hikes on the economy and potential headwinds from reduced bank lending.

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Powell's testimony before the House panel focused on points he previously addressed during his press conference. He highlighted the progress made in reducing inflation but cautioned that more needs to be done. Bringing down inflation is likely to require a period of below-trend growth and some softening of labor market conditions.

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While consumer spending has improved, housing remains weak, and high rates are impacting business investment. The labor market remains tight, but signs of cooling have emerged, and Powell suggested that the strong job market may not persist with elevated inflation.

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Regarding the banking system, Powell assured that it is sound and resilient despite the failures of certain banks earlier this year. He emphasized the importance of addressing vulnerabilities and implementing appropriate rules and supervisory practices for banks of a certain size to ensure a stronger and more resilient banking system.

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