What to Know in Washington: Powell Aims to Explain Rate Pause

Federal Reserve Chair Jerome Powell will have an opportunity this week to clarify what many found a confusing message on the path of interest rates, with the added task of assuring Democrats and Republicans the economy is on track.

The Fed chief will face questions from lawmakers tomorrow and Thursday, his first testimony on Capitol Hill since early March, before banking-sector turmoil prompted sharp criticism of the Fed and forced officials to rethink their policy strategy. Since then, the most acute financial strains have eased, but questions remain about the extent to which tighter credit will weigh on the economy, and what that means for the Fed.

Photographer: Sarah Silbiger/Bloomberg

Powell will need to reassure Republicans the Fed is not backing down from its campaign to contain price pressures, while pointing Democrats to the resilience of the economy as officials prepare to raise rates further this year.

Powell will be fresh off the Fed’s June 13-14 meeting, where he and his colleagues left rates unchanged for the first time in 15 months but signaled they may deliver two more hikes this year. Fed watchers and investors struggled to digest the message from Powell’s post-meeting press conference, and lawmakers last week said they planned to press him for an explanation.

The Fed has raised rates five percentage points since March 2022, one of the fastest tightening campaigns in its history. That gives officials room now to take a breather and monitor incoming data as they consider their next move, Powell said last week.

The Fed’s quick action over the past year — a catch-up strategy after policymakers failed to realize how persistent inflation would be — has drawn criticism from progressive Democrats fearful that higher rates would cause a surge in unemployment. The jobless rate recently inched up from its 50-year low, but employers continue to hire workers at a rapid clip.

Despite continued worries about inflation, which peaked at more than 9% last year, Republicans said they were concerned about how additional hikes could further unsettle the financial sector in the wake of several bank failures this year.

Democrats are likely to push Powell for more stringent rules, including rolling back the asset cap increases of 2018 that many blame in part for Silicon Valley Bank’s troubles. Republicans have argued against increased burdens on banks that Fed Vice Chair Michael Barr has said the Fed is exploring, and question instead the regulator’s own supervisory shortcomings in the lead up to the failures. Read the full story from Catarina Saraiva, Steven T. Dennis, and Laura Litvan.

CONGRESS SCHEDULE

• The House is back for votes at 6:30 p.m. on VA benefits bills.
• Senators convene for a vote at 5:30 p.m. on a federal appeals court nominee.

BIDEN’S AGENDA

• President Joe Biden meets at 1 p.m. in San Francisco with experts on AI as his administration pushes companies to develop new security and privacy safeguards. Read more.
• The president departs San Francisco to attend a 4:15 p.m. campaign reception in Kentfield, California.
• Biden returns to San Francisco to attend a 7 p.m. campaign reception.

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To contact the reporter on this story: Giuseppe Macri in Washington at gmacri@bgov.com

To contact the editor responsible for this story: Kayla Sharpe at ksharpe@bloombergindustry.com