Federal Reserve Chairman Jerome Powell discussed our most urgent economic concerns recently at a House Financial Services Committee hearing. He provided an inside perspective on the Fed’s evolving view of inflation, interest rates, and the persistent national shortage of housing. He went on to clarify that the Fed is not planning rate cuts anytime soon. They’re calling for more data, which is harder to come by since inflation will soon start rising again. This claim highlights the Fed’s dovish monetary policy stance in light of precarious economic circumstances.
Powell doubled down on the inflationary pressures impacting building materials and infrastructure. He pointed out that these factors are having a greater impact on the housing shortage than increasing mortgage rates. He did a good job of countering criticism from Congresswoman Ilhan Omar swayed by the debate over how higher mortgage rates help to increase housing supply. Powell’s answers showed his political savviness in stonewalling loaded questions and sticking to the major economic impact at hand.
Powell reaffirmed that neither inflation nor unemployment is prioritized over the other within the Fed’s decision-making hierarchy. This balanced approach reflects the complexities of managing an economy as large and diverse as that of the United States. Despite its size, Powell noted that trust in the U.S. economy has begun to wane, posing challenges for future economic stability.
The Chairman dealt with the problem of twin deficits directly. He proposed that this country has always been great when we were living in a high sense of “exceptionalism.” He warned that this privilege is running dry, especially from the impact of former President Donald Trump’s policies. Powell’s remarks reflect a deepening worry over long-term economic viability if we persist down this path.
Powell observed that the probability of a September rate cut has jumped to 68.8%. That is a huge jump from the 47.7% odds calculated only a month ago. This change isn’t surprising given market expectations after some major economic data points over the last week. He warned that if inflation readings show significant increases before the Federal Open Market Committee (FOMC) meeting on September 17, the anticipated rate cut could be off the table.
Probability of a July 30th rate cut is still about 20% unchanged. These numbers show how much the market remains volatile and uncertain about what the Fed will do next with monetary policy.
Powell spoke to both the state of the nation at home and the changing world abroad. In particular, he underscored the quick unravelling of trade effects as a result of the Israel-Iran war. He warned that growing geopolitical tensions might make economic forecasting and policymaking even more challenging.
Secondly, Powell called out the potential taxation on earnings of foreign-held U.S. assets. He warned that this step would set off a much broader capital outflow, which would reduce domestic investment and stifle economic development. If passed, such measures will deepen the troubling trend of increasing challenges and further poison an already-combustible economic climate.
Economist Michael Powell emphasized that the euro could be affected in the short term by currency speculation. “Next bearish target is at or below 1.1450,” he proposed. At the same time, he reiterated doubts that the EUR/USD would be able to stay under this important support level—1.1210—for long. He warned that reaching this threshold would have a negative impact on market stability.
Powell noted that, as always happens when financial markets reach a crisis point, traders will rectify at month-end, quarter-end, half-year end. This level of activity could have a major impact on trading patterns and economic activity during these times.