Fed Chair Powell’s Testimony Summary:
Economic Outlook and Policy Rate Adjustments
- The Federal Reserve does not foresee reducing the policy rate until there is greater confidence that inflation is moving sustainably toward the 2% target.
- A possible dial-back of policy restraint could occur later this year, with the policy rate likely at its peak for this cycle due to uncertain economic outlook and unassured progress toward 2% inflation.
- Incoming data, evolving outlook, and risk balance will be closely assessed, acknowledging risks of adjusting rates too early/fast or too late/little.
- Notable progress has been made toward the Fed’s dual mandate over the past year, with inflation easing substantially despite being above 2%.
Rates and Inflation Confidence
- The Fed seeks more data to gain confidence in controlling inflation, emphasizing the importance of a cautious approach given the economy’s strength and tight labor market.
- There’s an anticipation that housing services inflation will decline.
Capital Rules and Basel 3
- No decisions have been made on proposed capital rules, but significant changes to the Basel 3 proposal are expected.
- The Fed is in the initial stages of deciding its approach to Basel 3, considering the feedback received, which has been unprecedentedly voluminous.
Economic Growth and Risk of Recession
- Continued solid growth is observed, with no significant near-term recession risks identified.
- The labor market remains tight and strong, supporting the pursuit of a soft landing to maintain economic growth and progress on inflation.
Commercial Real Estate and Banking Sector
- Commercial real estate risks are deemed manageable, with ongoing efforts to ensure banks can handle potential losses, which could persist as a challenge for several years.
- Banks with high concentrations in commercial real estate are expected to face losses, emphasizing the seriousness of the issue in certain locations.
Future Rate Adjustments and Economic Developments
- If the economy evolves as hoped, significant rate reductions could be expected in the coming years, contingent on witnessing more favorable inflation readings.
- The Fed is prepared for potential surprises in the economy’s next chapter, indicating a readiness to adapt policy in response to unforeseen developments.
Technology and Labor Force
- A focus on AI’s implications for the economy and labor market, with its potential to either augment or replace labor, remains a point of attention.
- Immigration and labor force participation have been key contributors to strong economic growth in 2023, with optimism for sustained productivity gains.
In summary, Fed Chair Powell’s testimony highlighted a cautious yet optimistic outlook on the economy, emphasizing data-driven policy decisions, the management of inflation towards a 2% target, and the adaptability to evolving economic conditions and challenges such as commercial real estate risks and the impact of technological advancements.
At the conclusion of his testimony:
- Dow was up 178.58 points or 0.46%
- S&P index was up 41.30 points or 0.81%
- NASDAQ index was up 156.28 points or 0.98%
In the US debt market:
- 2-year yield 4.536%, -1.5 basis points
- 5-year yield 4.099%, -3.9 basis points
- 10-year yield 4.098%, -3.9 basis points
- 30-year yield 4.244%, -3.0 basis points