Federal Reserve Chairman Jerome Powell testifies during a hearing of the U.S. House Oversight and Reform Selection Subcommittee on the coronavirus crisis on June 22, 2021 on Capitol Hill, Washington.

Graeme Jennings | Swimming pool | Reuters

Federal Reserve Chairman Jerome Powell has the task this week of convincing Congress that the central bank’s ultra-light policy is still correct during the pandemic.

This time it may not be that easy.

While Powell’s negotiations with Congress have been remarkably friendly, this time around, there is at least the possibility that the questioning could be sharpened a little. Some of the leadership in Congress, particularly the Republican side, have urged the Fed to ease the monetary pedal, particularly on the still-in-play bond purchases of at least $ 120 billion a month.

So Powell will have to show that a rapidly recovering economy, grappling with the highest inflationary pressures in well over a decade, still needs crisis-level policies to sustain it.

“The last time he spoke [on June 22] was before the House of Representatives Financial Services Committee. It was a waste of time, ”said Peter Boockvar, Bleakley Advisory Group’s chief investment officer. “Not many people challenge him. That’s the problem with these testimonies and appearances in Congress. “

In fact, Powell only occasionally faces a difficult question or two when he appears on Capitol Hill, as he will on Wednesday and Thursday when he gives his mandatory biannual report on the state of monetary policy.

The Fed’s response to last year’s Covid-19 crisis, in which it launched an unprecedented set of tools to tackle market turmoil and turmoil in the economy, generally received high marks in Congress.

But things are changing.

Inflation expectations rise

The economy is back on its own ahead of Covid, at least in terms of GDP, the stock market has continued to skyrocket and inflation is driving higher. A New York Fed consumer survey on Monday showed that inflation expectations are the highest in at least eight years, amid a sustained rise in house prices that has sparked bubble fears.

“I hope he will be asked a question about living,” said Boockvar. “Housing construction is obviously the most interest-rate sensitive part of the economy and is therefore most directly influenced by monetary policy.”

If things go after the previous Powell-Congress exchanges, he would likely say that the Fed is watching the housing market closely for signs of overheating, but is not seeing any.

Still, the sentiment of the members of the Federal Reserve’s Monetary Open Market Committee is changing.

At the June meeting, the group preferred the first post-crisis rate hikes to 2023 and was only a “point” away from taking a step into the next year that the market is already pricing in. A few itchy fingers on the FOMC could make Powell’s job more difficult.

“It’s definitely difficult for them now,” said Tom Graff, Brown Advisory’s head of fixed income. “You can’t know how much current inflation is temporary. Some are definitely temporary, but some are not. So you have to be careful about how much they promise. You can’t afford to be too specific about how long they last. ” may be willing to let politics be so accommodating. “

Recent releases of Fed documents show a central bank with little certainty about future developments in inflation in particular and the economy in general.

The minutes of the June meeting were full of ambiguity about how FOMC members saw the path ahead. A report that Powell will run along with his statement released on Friday found that “the upside risks to the inflation outlook have increased in the near future,” even as policymakers maintain their belief that they will eventually fade.

In addition, the Powell Fed has placed great emphasis on the employment side of its dual mandate. In line with its current mission statement, the central bank seeks a return to employment that is both full and racial, gender and income related. While the unemployment rate is well below its Covid peak, it is currently 5.9%, still well above the pre-crisis rate of 3.5%.

Powell’s “confidence that the labor market will make” significant further progress “could be an indication of his support for an earlier start to reducing monthly asset purchases, wrote Citigroup economist Andrew Hollenhorst.

Boockvar said he hopes but doesn’t expect Powell to provide a clear path to exit from current levels of political support.

“It’s an exaggeration. A policy that was okay a year ago is not okay now, and in fact, it can be argued that it was overdone,” Boockvar said. “Here is a classic too much money at stake that chases too few goods. We don’t have a demand problem, we have a supply problem.”

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