Powell: high inflation is temporary, should still be highly accommodative

In the early hours of Thursday morning Beijing time, Fed Chairman Jerome Powell made a testimony presentation on the semi-annual Monetary Policy Report before the House Financial Services Committee. Here are the highlights of his speech.

Tapering of bond purchases is being considered, and the timing and format will be discussed at the July meeting

Powell said the Fed is considering tapering its asset purchases. He said.

“If we continue to make progress, we will begin tapering. The timing and composition of the tapering of bond purchases will be discussed at the July meeting.”

Powell reiterated that the Fed will give notice before starting to scale back its bond purchases. He also stressed that monetary policy should remain highly accommodative. The current quantitative easing policy is very necessary for the labor market.

Inflation data this week exceeded expectations and will remain higher in the coming months before slowing down

Powell said the Fed, like everyone else, is eager for inflation to fall. The Fed is not sure that high inflation is “temporary,” but still believes it is.

He said that at some point, if inflation data does not fall, the Fed’s description of inflation will “reverse”. If inflation is expected to rise in a disturbing way, the Fed will react. But even if high inflation persists, the Fed is not expected to act soon. He said.

“We have the ability to deal with inflation. There’s no guidance that prevents us from doing the right thing at the right time.”

Powell also said the Fed should view the current high inflation as temporary unless it persists year after year. It would be wrong for the Fed to act prematurely because they still predict inflation will fall. He also said it won’t take long for the Fed to know if higher inflation is only temporary.

Digital currency report expected to be released in early September, stable coins need proper regulatory framework

Powell noted that the Fed is accelerating its decisions on digital currencies and is expected to release a digital currency report in early September.

He said the Fed is in the very early stages of designing a digital currency that may incorporate Know Your Customer (KYC) standards. He said stable coins need an appropriate regulatory framework and need to be regulated in a similar way to money markets and bank deposits.

Powell also said that the risks facing digital currencies are real. Central bank digital currencies may preclude the need for stablecoins and cryptocurrencies, which is a strong argument in its favor.

The labor market is improving, but there is still a long way to go and the unemployment rate can return to 3.5%

Powell said there is still a long way to go before full employment is achieved and it probably will still not be achieved even after the wave of labor supply arrives.

Hiring difficulties are widespread, but Powell believes this will improve. He said it is quite certain that a high level of labor force participation can be achieved again. Imbalances in inflation and payrolls will also be eased, although it is not known when this will happen, but it is very likely.

Powell said the Fed will remain patient with employment issues. One of the conditions for a rate hike is that the economy is within the range of full employment.

The housing market will be a factor in the Fed’s discussion of the debt reduction plan and its composition

Powell said home prices in the U.S. are rising at a very high rate. Low interest rates are pushing up home prices, but personal preferences and material shortages are also pushing up home prices. The housing market will be a factor in the Fed’s discussion of the tapering plan and its components.

He said the purchase of home mortgage-backed securities and the purchase of Treasury bonds have roughly the same impact on the economy. The Fed’s asset purchase program is not designed to support any particular industry, including the housing industry.

Market commentary suggests that Powell emphasized the Fed’s inability to alleviate housing supply shortages and influence home prices, seemingly coming down in the camp of those opposed to scaling back mortgage-backed securities (MBS) purchases earlier or sooner.

Powell will also make a testimony presentation on the semi-annual monetary policy report before the Senate Banking Committee at 21:30 on Thursday evening. Stay tuned.