Fed's Powell Hawkish for Two Consecutive Days: "Two More Rate Hikes This Year Appropriate"

Jerome Powell, Chair of the U.S. Federal Reserve (Fed), confirmed hawkish (preference for monetary tightening) messages for the second consecutive day. He explained that to lower inflation, two additional interest rate hikes are needed within the year, and that the decision to hold rates steady this month was a kind of 'speed adjustment' to secure more time for future monetary policy decisions.

On the 22nd (local time), Powell appeared before the Senate Banking Committee hearing and stated, "The majority of Federal Open Market Committee (FOMC) members believe there will be two rate hikes this year." This reaffirmed the hawkish stance he had expressed the previous day at the House Financial Services Committee, where he described the dot plot forecasting two rate hikes within the year as a "pretty good guess."

[Image source=Reuters Yonhap News]

Powell's remarks focused on the fact that while additional rate hikes will continue, the pace will be much more gradual compared to the tightening cycle that began last year. He said, "The data will tell us what we need to do going forward," and evaluated, "The key in the last meeting (June FOMC) was to adjust the pace of decision-making." He explained, "Last year, moving quickly was very important, so we did that. Now, we are close to the destination, and moving at a cautious pace is appropriate."

Since March last year, the Fed raised rates ten consecutive times, pushing the rate to 5.0?5.25%. At the June 14 FOMC meeting, the Fed decided to hold rates steady, marking its first pause. Regarding this, Powell said, "It was to secure more time to make decisions," adding, "We do not want to make the mistake of tightening too much unnecessarily."

Expressing concerns about core inflation, Powell asserted, "I think we are close to the terminal point, but more rate hikes are needed." When asked about the possibility of rate cuts within the year, he drew a line, saying, "That does not seem likely to happen soon." According to the dot plot released by the Fed immediately after the June FOMC, the median year-end rate forecast is 5.6%. This implies that two baby steps (0.25 percentage point hikes) are possible by the end of the year from the current level. Powell also added regarding the possibility of rate cuts next year, "There must be confidence that inflation will come down to the 2% target."

Democratic members, including Chair Sherrod Brown, pointed out that the Fed's prolonged fight to lower inflation could cause greater damage to the job market, especially among minorities. Powell responded, "The people who suffer most directly and quickly from inflation are working families," adding, "The need to restore 2% inflation is for everyone, including them, and we are doing our best to control inflation." He also mentioned, "We see a path where unemployment does not rise much and inflation falls." Regarding the credit tightening effects following the Silicon Valley Bank (SVB) collapse, Powell said, "They are not appearing immediately. We are monitoring what effects they may have."

Currently, the market widely expects the Fed to resume rate hikes at the next July FOMC meeting. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) futures market currently reflects nearly a 77% chance of a baby step in July. However, unlike the Fed's dot plot forecasting two hikes within the year, the rate futures market still favors a scenario of one hike followed by a continued hold.

On the same day, Fed Governor Michelle Bowman also supported more than two additional rate hikes within the year. At an event, Bowman said, "I supported the hold decision at last week's (FOMC)," adding, "Additional policy rate increases are necessary to bring inflation down to the target." She emphasized that rates need to be raised to a sufficiently restrictive level for inflation to approach the 2% target. Edward Moya, senior market analyst at OANDA, told CNBC, "Powell's remarks could mean rate hikes will not stop until fall," adding, "If other central banks are ready to implement two or more rate hikes, it could be easier for the Fed to maintain an aggressive tightening stance."

On the same day, the Bank of England (BOE) raised rates by 0.5 percentage points to 5.0%, the highest level in 15 years since the 2008 global financial crisis. The Central Bank of T?rkiye raised rates from 8.5% to 15%, a 6.5 percentage point increase. The Central Bank of T?rkiye confirmed, "We will strengthen monetary tightening in a timely and gradual manner until the inflation outlook improves significantly." The central banks of Switzerland and Norway also implemented rate hikes.