Waters’ hearing debut, “New Fed Communications”: Emphasized zero tolerance for high inflation but did not signal a rate path

By Li Dan, Wall Street Insights

The Federal Reserve chair Powell’s “debut” at his congressional monetary policy hearing has laid out his “Fed reform manifesto.” It did not provide the market with the rate-cut or rate-hike signals it cares about most. Instead, he repeatedly stressed restoring price stability, maintaining the Fed’s independence, and pledged that future adjustments to the balance sheet will be communicated well in advance.

Nick Timiraos, a reporter dubbed the “New York Fed Correspondent,” believes that Powell deliberately avoided making any hints about the future interest-rate path that day, and instead focused the hearing on reaffirming the Fed’s long-term goal of controlling inflation.

Just before the hearing began, the U.S. released June CPI, which came in below market expectations, briefly pushing markets to further bet that the Fed would ease policy sooner. However, Powell played down the importance of the data, saying he does not think the inflation task has been completed.

Timiraos noted that Powell did not use the inflation data to signal any future policy direction, nor did he reveal the rate path for the July FOMC meeting or afterward. He instead insisted on emphasizing that the Fed has two policy tools—interest rates and the balance sheet—and will decide how to use them based on economic data to achieve the price-stability goal.

Bloomberg, meanwhile, believes that this multi-hour hearing effectively sketches the policy framework of the “new Fed”: it keeps monetary policy independence, sticks to the 2% inflation target, rejects the idea that employment and inflation are an either-or choice, and leaves room for future balance-sheet reform and central bank governance reform.

Driven by Powell’s slightly hawkish remarks, U.S. Treasury yields pared back some of the declines after CPI was released during his hearing, and the U.S. dollar index narrowed about half of the drop following the CPI release.

Five signals: Powell’s first congressional hearing outlines the “new Fed” policy framework

Reiterates “zero tolerance” for persistent high inflation, says a single CPI pullback is not enough to declare victory over disinflation

At the hearing, Powell stressed that the Fed has “zero tolerance” for persistent high inflation. He said the Fed has failed to hit the 2% inflation target for years in a row, so restoring price stability remains the most important policy task right now.

In response to the June CPI data released that day, which clearly came in below market expectations, Powell said, “Some people might say, mission accomplished—I don’t see it that way.”

Timiraos believes Powell repeatedly reaffirmed the long-term inflation goal and did not adjust policy statements due to improvement in a single month of data, highlighting his desire to prevent the market from interpreting one inflation print as a signal that monetary policy is about to turn.

No rate path revealed, says action will still be based on data going forward

On the next rate move markets care about most, Powell remained restrained throughout.

Timiraos pointed out that Powell did not hint at the policy direction for the next several FOMC meetings, nor did he answer when rates might change. Instead, he emphasized that the Fed has two tools—interest-rate policy and balance-sheet policy—and will assess whether and how to use them based on future economic data.

At the same time, Powell revealed that over the coming period he will discuss with his FOMC colleagues whether and when policy tools would be needed, and described it as potentially involving a “family fight.”

Bloomberg believes this implies that although Powell did not provide explicit policy guidance, his overall wording still leans hawkish. It suggests that until inflation is confirmed to have returned persistently to target, he is not willing to readily release easing signals.

Employment and inflation are not a “cruel choice” of either-or

Regarding lawmakers’ questions about the Fed’s dual mandate, Powell denied the existence of any so-called “cruel choice.”

He said that as long as price stability is restored, the U.S. economy can continue to grow and companies can keep expanding hiring. Therefore, controlling inflation and achieving full employment are not in conflict with each other; they reinforce one another.

This further strengthens his policy philosophy: stabilizing prices itself is the foundation for achieving long-term employment growth and economic prosperity.

Balance-sheet reform will be previewed, not suddenly shock the market

Balance-sheet reform has long been an important reform topic since Powell took office.

However, at this hearing, he said he does not want to pre-judge the conclusions of the balance-sheet working group currently doing the work.

Meanwhile, he pledged that if the Fed adjusts its balance-sheet policy in the future, it will communicate with the market in advance to ensure investors have sufficient expectations, and will not take action abruptly.

Powell again emphasized that the Fed’s balance sheet should serve monetary policy, not take on the role of fiscal policy.

Reuters believes this stance helps ease market concerns that a new balance-sheet reduction round could be pushed forward too quickly, and also means the Fed will place greater emphasis on policy communication and managing market expectations going forward.

Sticking to monetary policy independence draws positive responses from some lawmakers of both parties

In response to lawmakers’ questions, Powell again emphasized that the Fed will remain independent in formulating monetary policy, and pledged that setting interest rates will not be swayed by political factors.

Bloomberg reported that although Powell received almost no support from Democrats during his confirmation process in the Senate, at this hearing, several Democratic lawmakers still gave positive evaluations of his stance on central bank independence.

Senior congressional reporter Steve Dennis said that amid Trump’s continued public pressure on the Fed to cut rates, some Democratic lawmakers chose to openly support Powell’s position on maintaining central bank independence. This also reflects a subtle shift across the two parties on this issue.

Powell’s hearing strengthens the communication framework that policies are determined by data

How does the market view Powell’s hearing? Overall, his remarks did not change the near-term interest-rate outlook, but they strengthened a new communication framework of “policy determined by data.”

Timiraos believes the biggest feature of Powell’s hearing was not the release of new policy signals, but the deliberate absence of any signal about the interest-rate path.

Facing a CPI report that came in below expectations, Powell did not discuss whether the Fed would cut rates next, nor did he provide any forward-looking guidance. Instead, he kept framing everything around restoring price stability, Fed independence, and policy tools—continuing the communication approach he has used since taking office to avoid committing to conclusions based on a single piece of data or a single meeting.

Bloomberg, meanwhile, believes the hearing further lays out the policy tone of the Fed under Powell: continue to put price stability first, while advancing balance-sheet and central bank governance reforms, and manage market expectations through more transparent communication.

For investors, this means that Fed policy going forward will still rely heavily on data performance rather than a pre-set interest-rate path. The market will also focus more on how Powell, in the coming months, will implement this philosophy into the FOMC’s actual decisions.