Federal Reserve Chair Jerome Powell testified before Congress and provided an update on monetary policy and his outlook for the economy. He was grilled by lawmakers from both sides of the aisle. Republicans were focused on rising inflation and whether Fed policy, high deficits or excessive stimulus was part of the problem.
Democrats were more focused on the potential for another outbreak, continued gap in employment figures, the Fed's previous tendency to overshoot in terms of expectations for hikes and inflation, and the potential that the Fed could be repeating that mistake with its recent nod to inflationary pressures. Adding to the mix were rumors that President Biden may look to replace Powell as Federal Open Market Committee Chair due to an insufficient focus on financial regulation.
Here are some highlights from Powell's testimony:
- In his remarks to the House Financial Services Committee, he noted the improvements from the start of the crisis but added that the labor market remains weaker than it was pre-pandemic. He added that there is substantial progress towards their goals, and officials are now talking about tapering asset purchases. He said that inflation was "elevated" but that it would likely prove transitory.
- In some comments on cryptocurrencies, he was unsure about whether the Fed would ever need to create its own digital currency. He also called for the need to regulate stable coins. Stablecoins play an important role in the crypto and defi ecosystem, however, there is concern that there is nothing backing these coins, so there is a vulnerability to a sudden decline in price.
- In terms of the timing to begin tapering, Powell was clear that he felt it was a "ways off". This comment caused the 10Y yield to decline.
- Powell cited three reasons for higher inflation readings: "base effects" as last year's comps were extremely weak due to the coronavirus and shutdowns; supply chain issues, and a stronger than expected surge in demand. He said that a small portion of the economy is generating most of the inflation.
- Powell also said it would be a mistake for the Fed to act prematurely on these inflation numbers given that they are most likely transitory.