In its semi-annual Monetary Policy Report to Congress on Friday, the Federal Reserve emphasised that inflation is still too high and that further increases in interest rates are necessary to bring it back down to the Fed’s goal rate of 2%.
The Federal Reserve “is acutely aware that rising inflation imposes significant hardship, especially on those least able to absorb the higher costs of necessities,” the study said.
In his semi-annual testimony to Congress next Tuesday before the Senate Banking Committee and on Wednesday before the House Financial Services Committee, Fed Chair Jerome Powell will discuss this report and monetary policy in general.
He is anticipated to take a beating during those sessions from inquiries about future rate increases and inflation. Powell will be testifying for the first time since the House was taken over by the Republicans.
The Fed repeated in a report that was mostly retroactive that lowering inflation will probably necessitate a period of below-trend growth and a weakening of the labour market. The employment market is still quite robust, and officials stated that in order to lower the high inflation in the services sector, the job market will need to shrink.
The report also mentioned that while market functioning remained orderly, market liquidity remained low relative to pre-pandemic levels in several important areas, including the Treasuries market. The Fed stated that should an economic or financial development need it, it is ready to modify the winding down of its balance sheet.
The Fed also stated that although financial conditions have tightened somewhat since last June, stock market valuations have remained prominent and have, on the whole, moved upward as stock prices rose moderately despite falling profit forecasts.
According to the report, the Fed’s interest expenses increased significantly as a result of the high interest rates used to combat inflation, which caused a decline in net revenue.
Since last year, the central bank has increased the federal funds rate several times, bringing it to a range of 4.5% and 4.75%.
Prior to the central bank’s upcoming policy meeting on March 21–22, where officials are still overwhelmingly anticipated to raise their benchmark interest rate by a quarter percentage point, Powell’s testimony next week will be his final opportunity to speak. Given that inflation gauges have recently showed greater indications of stickiness in the American economy, they will provide new interest rate estimates.
