Federal Reserve Chair Jerome Powell will begin two days of hearings before Congress on Wednesday that will likely focus on the question that consumed the central bank last week: How far and how fast will the Fed raise its key interest rate from here?
The hearings, beginning with the House Financial Services Committee, follow a Fed meeting last week that produced a muddled picture of its likely next steps. The 18 members of its policy committee predicted two more interest rate hikes this year — one more than analysts had expected — to fight inflation, which they now think will be higher next year than they previously forecast.
Despite that dour forecast, the Fed's policymakers agreed last week to forgo a rate hike for the first time in 11 meetings dating back to March 2022. And at a news conference, Powell explicitly said no decisions had been made about whether to raise the Fed's benchmark rate at its next meeting in late July. Still, most economists inferred from both the policymakers' forecasts and Powell's words that a rate hike next month is all but assured.
The “meeting was hawkish, and peculiar,” said Michael Feroli, an economist at JPMorgan and a former Fed staffer. “Why not just go ahead and hike?" (In Fed parlance, “hawks” generally favor higher rates to quell inflation, while “doves” typically advocate lower rates to aid a healthy job market.)
Powell stressed at his news conference that leaving rates unchanged for now would allow the Fed to take time to assess the impact of its rate increases on the economy before deciding on its next moves. It has raised its benchmark rate by a substantial 5 percentage points in barely more than a year — the fastest pace of rate hikes in four decades.
“Given how far we have come, it may make sense for rates to move higher but at a more moderate pace,” Powell said. “It’s just the idea that we’re trying to get this right.”
The Fed's rate increases have made borrowing for consumers and businesses more expensive across a range of loans, including home and auto loans, credit cards and business borrowing. The goal has been to cool inflation by slowing spending and hiring.
Powell reiterated that the Fed still hopes to pull off a tricky feat: Weaken the economy enough to tame inflation, without undermining it so much as to cause a deep recession.
“There is a path to getting inflation back down to 2% without having to see the kind of sharp downturn and large losses of employment that we’ve seen in so many past instances,” the Fed chair said. “It’s possible.”
Yet both Republicans and Democrats in the House and Senate may express misgivings about whether the Fed can pull off such a feat. Republicans might raise concerns that the Fed isn't moving fast enough to defeat high inflation. Democrats may press Powell on whether the central bank has already done enough and whether further hikes could lead to a harsh recession.
Powell has sought to straddle both views regarding the Fed's progress on inflation. Last week, he said that inflation remains too high and added that there hasn't been nearly as much progress in slowing it as the Fed would like.
At the same time, the Fed chair added, “the conditions that we need to see in place to get inflation down are coming into place.”
The sometimes-conflicting messages suggest that Powell has sought to balance competing demands from hawks and doves on the Fed's interest-rate setting committee. For now, the hawks seem to predominate: Last week, 12 of the 18 policymakers indicated that they envision at least two more rate hikes this year, and four predicted one additional increase. Only two officials forecast that the central bank will keep its key rate at its current level of 5.1% through year's end.
On Tuesday, Republicans on the House committee may also raise concerns about the Fed's regulation of banks in the aftermath of three large bank failures since March.
Michael Barr, the top regulator on the Fed's board, has suggested that he would support requiring banks to set aside more capital to offset potential loan losses. Such a move is opposed by the banking industry, which argues that doing so would reduce banks' ability to lend.
