Key Points of Powell’s Hearing on the First Day: Interest Rates Need to Continue to Raise, Cryptocurrencies Need Better Regulation

On June 22, local time, Federal Reserve Chairman Powell testified before the U.S. Senate Banking Committee on the semi-annual monetary policy report. Powell said the Fed’s fight against inflation could allow it to raise interest rates high enough to cause a recession.

Here are the main takeaways from the first day of Powell’s hearing:

About the rate hike:

Powell: In the next few months, we will be looking for convincing evidence that inflation is falling, consistent with inflation falling back to 2%. We expect continued rate hikes to be appropriate for now. The pace of change will continue to depend on future data and changes in the economic outlook.

It’s fitting that a string of additional rate hikes has been priced in by the market. The latest inflation indicators suggest that we need to increase the pace of rate hikes . We will see interest rates continue to rise rapidly.

Asked about the possibility of a 100bps rate hike, Powell said a hike of any magnitude (including 100bp) would never be ruled out.

About cryptocurrencies

Powell: Cryptocurrencies need better regulation . So far, the sharp fall in cryptocurrencies has not had a clear macro impact . The stablecoin market has not yet formed the necessary regulatory mechanism.

About the U.S. economy

The U.S. economic environment is generally favorable, with a strong labor market and continued high demand.

Powell acknowledged that the Fed’s rate hikes to suppress high inflation could lead to a recession in the United States, but that was not the Fed’s intention. Very cautious about forecasting the economy for the next three years.

He also noted that he does not see a particularly high chance of a recession. Recent data shows that real GDP rose in the quarter and consumer spending remains strong. The U.S. economy is highly competitive, but some industries are less competitive. We don’t think we need to trigger a recession.

Powell believes that the U.S. economy is very strong and can cope well with the impact of tighter monetary policy. The tightening of financial conditions seen in recent months should continue to dampen economic growth and help better balance demand with supply.

The Fed is aiming for a soft landing, but that would be “very challenging.” Aside from a recession, the other risk for the U.S. is that inflation becomes more entrenched and the Fed cannot afford to fail to control it.

Regarding inflation:

Powell: We are actively tackling inflation. Price inflation is a macroeconomic issue.

Inflation is largely a global phenomenon. It is important to explore how to strengthen and improve global supply chains. Demand is a bigger factor in inflation in the US than in other countries. The Fed’s goal is to slow demand growth, not suppress demand. Congress could invest in human resources and infrastructure to help increase supply in the medium term, but probably not in the short term.

The Fed is “firmly committed” to continuing to raise rates until there is clear evidence that inflation will slow to the Fed’s target of 2% .

About the policy:

Powell: Rules have never been used on a large scale to make policy in real time. The end of the year is expected to be close to the level required by the Taylor rule.

We need restrictive policies and this is our direction. Policy rates remain relatively low. Hopefully it goes up to a more “neutral” level.

Regarding oil prices:

Regarding the surge in oil prices, Powell bluntly stated that the Fed is really powerless to oil prices, and this is not the Fed’s judgment on competition in the oil industry.

Other MPs:

Fed member Evans: There are many downside risks, we must remain vigilant and prepare to adjust our policy stance.

Views are broadly in line with expectations, with the policy rate at 3.25%-3.5% by the end of 2022 and 3.8% by the end of 2023.

A “significant” rate hike is needed in the coming months. A rate hike of 75 funds in July would be in line with ongoing concerns that inflation is not slowing. There is no need to raise interest rates by 100 basis points , maybe the data will show that the July meeting can raise interest rates by 50 basis points.

Fed’s Harker: Should keep interest rates above 3%, and then choose to pause rate hikes based on data. We need to move above the neutral rate, but not quickly above the neutral rate before seeing the impact of shrinking the balance sheet . So far, I have n’t seen a “contagion” problem with cryptocurrencies .

Institutional Analysis

Tianfeng Securities analysts released a research report pointing out that the U.S. economy may already be on the verge of a “Musk recession” , and the political pressure brought about by inflation is the current Fed’s top concern, and monetary decisions are still determined by inflation pressure and the timing of the NBER recession. Inflation is the redistribution of benefits. Since the epidemic, whether it is financial aid, raising the minimum wage, or raising taxes on multinational companies, the distribution of benefits is more skewed towards workers. As a result, future recessions may be more pronounced in the fall in corporate profits and capital returns, and the damage to the credit market and the U.S. stock market may be deeper than the labor market, which is the difference between stagflation and traditional recession cycles.

Dario, founder of the world’s largest hedge fund Bridgewater Fund, commented on the Fed, saying that central banks should use their power to drive markets and the economy, just like a good driver drives a car, using the accelerator and brakes appropriately to generate stability , instead of slamming on the accelerator and then the brakes, which can lead to leaning forward and falling behind. Dalio believes that the Fed’s raising interest rates to curb inflation is not a panacea for the economy. While austerity reduces inflation because it causes people to spend less, it doesn’t make things better. Because austerity deprives purchasing power, it just turns a squeeze from inflation into a squeeze from a reduction in purchasing power .

Sean Savage, head of fixed-income market structure research, said: “While Powell noted that the Fed’s moves are being read quite well, we believe that a faster move to higher rates could have further headwinds on the liquidity of U.S. Treasuries. As long as inflation remains in flux, the Fed’s communications and efforts on transparency could suffer from the need for flexibility, creating challenges for liquidity providers and investors.

Posted by:CoinYuppie,Reprinted with attribution to:
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