Federal Reserve Chair Jerome Powell spoke before Congress on Wednesday, warning that the fight against inflation is not over—making traders fear future rate hikes and thus unsettling the stock market.
- Powell gave testimony to the House Financial Services Committee for its semiannual report to Congress.
- He reports that, despite last week’s decision not to raise interest rates, the Fed is not done in its battle with inflation.
- The Fed also plans to revise its regulatory supervision practices following three of the largest banking crises in U.S. history this spring.
- Analysts are predicting another interest-rate hike as early as the July Fed meeting, Reuters notes.
Why It’s Important
Despite a strong economy, inflation continues to run hotter than desired at 4.05%, which could facilitate the need for additional hikes late this year.
The stock market has largely reacted positively to the Fed’s recent decisions. It has been able to calculate the expected price hikes into its predictions since last year, when hikes began in March 2022.
However, the negative predictions did shake Wall Street, which was previously enthused by the Fed’s decision to pause hikes. The S&P500 (0.5%) and Nasdaq 100 (1%) reacted negatively, with notable declines on Wednesday before largely recovering Thursday morning.
The Federal Reserve maintains a mandate to protect jobs and protect the currency at the same time—a challenge that has forced it to make harsh decisions for the better part of a year. Powell has repeatedly acknowledged that rapidly introduced interest-rate hikes could have a negative impact on the jobs market and economy.
This has drawn negative criticism from Democratic politicians, who argue that the Fed’s attempts to curb inflation misattribute the cause of the inflation spike and risk causing a recession.
With a momentarily strong housing market, a solid job economy, and resilient economic news, it appears that recession fears have been overstated. Analysts are predicting that a soft landing is possible, with inflation returning to normative levels sometime next year and the negative impact of high-interest rates being moderated by high consumer spending.
Continued hikes do risk enflaming the economy and setting in motion a more severe recession, as Powell has acknowledged. It remains to be seen how the current interest rates of 5% to 5.25% will play out in the economy over time. Still, the consistently lowering inflation rate from 9.1% in June 2022 has been a positive development.