Worsh issues new policy signals: emphasizes zero tolerance for high inflation, but does not indicate an interest rate path

Original title: {“Powell delivers first congressional testimony, sending signals of new policy; ‘New Fed communications’ media emphasizes zero tolerance for high inflation but does not hint at an interest-rate path”}

Original author: Li Dan, Wall Street Journal Insights

Federal Reserve Chair Powell’s “first appearance” congressional monetary policy testimony laid out his “new Fed policy manifesto.” It did not give the market the cut-rate or rate-hike signals it cares most about. Instead, he repeatedly emphasized restoring price stability, maintaining the Fed’s independence, and pledged that future adjustments to the balance sheet would be communicated well in advance.

Nick Timiraos, a reporter nicknamed the “New Fed communications agency,” believes Powell deliberately avoided making any hints about the future interest-rate path on the day, instead focusing the testimony on reiterating the Fed’s long-term goal of controlling inflation.

Just before the testimony began, the U.S. released June CPI, which came in below market expectations and briefly pushed markets to bet more on the Fed easing policy faster. However, Powell downplayed the importance of the data, saying he does not believe the inflation mandate has been completed.

Timiraos pointed out that Powell did not use the inflation data to release any inclination toward future policy, nor did he disclose the July FOMC meeting or the subsequent interest-rate path. He instead insisted that the Fed has two policy tools—interest rates and the balance sheet—and in the future will decide how to use these tools based on economic data to achieve the price stability goal.

Bloomberg, meanwhile, believes this multi-hour testimony actually outlines the policy framework of the “new Fed”: maintaining central bank independence in monetary policy, sticking to the 2% inflation target, not accepting the notion that employment and inflation are a cruel choice of “either/or,” and leaving room for future balance sheet reforms and central bank governance reforms.

Affected by Powell’s more hawkish tone, U.S. Treasury yields reversed part of the decline after CPI was released during the testimony period, and the U.S. dollar index narrowed about half of its post-CPI drop.

Five key signals: Powell’s first congressional testimony sketches the policy framework of the “new Fed”

· Reiterate “zero tolerance” for persistent high inflation; says one CPI drop is not enough to declare victory in disinflation

At the hearing, Powell emphasized the Fed’s “zero tolerance” for persistent high inflation. He said the Fed has failed to achieve the 2% inflation target for years, so restoring price stability remains the most important policy task right now.

In response to the June CPI data released that day, which was clearly below market expectations, Powell said: “Someone may say, mission accomplished, but I don’t see it that way.”

Timiraos believes Powell repeatedly reiterated the long-term inflation goal that day and did not signal any policy adjustment due to improvement in just one month’s data, highlighting his desire to avoid the market interpreting one inflation print as a signal that monetary policy is about to turn.

· No disclosure of any interest-rate path; emphasizes action will still be based on data going forward

When it comes to the next interest-rate move the market cares about most, Powell has maintained restraint throughout.

Timiraos noted that Powell did not hint at the policy direction for the next few Federal Open Market Committee (FOMC) meetings, nor did he answer when rates might be adjusted. Instead, he emphasized that the Fed has two tools—interest-rate policy and balance-sheet policy—and will determine whether and how to use them based on future economic data.

However, Powell also revealed that in the coming period he will discuss with FOMC colleagues whether and when policy tools need to be used, and described that there could be a “family fight” at that time.

Bloomberg believes this statement implies that although Powell did not provide explicit policy guidance, his overall wording still leans hawkish—showing he is unwilling to easily release easing signals before confirming inflation continues to return to target.

· Employment and inflation are not a “cruel choice” between the two

Asked by lawmakers about the Fed’s dual mandate, Powell denied that there is 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 are mutually reinforcing.

This further reinforces his policy philosophy: keeping prices stable is itself the foundation for long-term employment growth and economic prosperity.

· Balance-sheet reform will be telegraphed early, not abruptly shock markets

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

However, at this hearing, he said he does not want to prejudge the conclusions of the balance-sheet reform working group that is currently doing the work.

At the same time, he pledged that if the balance-sheet policy is adjusted in the future, the Fed will communicate with the market well in advance to ensure investors have sufficient expectations and that it will not take action abruptly.

Powell reiterated again that the Fed’s balance sheet should serve monetary policy rather than take on the functions of fiscal policy.

Reuters believes this statement helps ease market concerns that a new round of balance-sheet reduction reforms might move too quickly, and also implies that in the future the Fed will place more emphasis on policy communication and managing market expectations.

· Sticking to central bank independence in monetary policy, earning positive responses from some lawmakers of both parties

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

Senior congressional reporter Steve Dennis believes that against the backdrop of Trump repeatedly putting public pressure on the Fed to cut rates, some Democratic lawmakers have chosen to openly support Powell’s position on safeguarding central bank independence, reflecting a subtle shift on this issue across both parties.

Powell’s testimony strengthens the communications framework of data-determined policy

How does the market view Powell’s testimony? Overall, Powell’s remarks did not change the near-term interest-rate outlook, but they did strengthen a new communications framework of “data determines policy.”

Timiraos believes the biggest feature of Powell’s testimony is not releasing new policy signals, but deliberately not releasing any signals about the interest-rate path.

Facing a CPI report that came in below expectations, Powell did not discuss whether to cut rates next, and did not provide any forward-looking guidance. Instead, he kept focusing on restoring price stability, Fed independence, and policy tools, continuing his post-take-office approach of avoiding commitments to one single data point or one single meeting.

Bloomberg believes the testimony further outlines the policy tone of the Fed under Powell: continuing to prioritize price stability, while advancing balance-sheet and central bank governance reforms, and managing market expectations through more transparent communication.

For investors, this means that Fed policy in the future will still rely heavily on data performance rather than a pre-set interest-rate path, and the market will pay even more attention to how Powell will implement this idea in the actual decisions of the FOMC over the coming months

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