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Powell Sends New Policy Signal: Emphasizes High Inflation Tolerance But Does Not Hint at Rate Path

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Powell Reiterates "Zero Tolerance" for Persistent High Inflation, Asserting that a Single CPI Decline is Insufficient to Declare Victory over Inflation.

Original Title: "Powell's Congressional Testimony Debut Sends New Policy Signal, 'New Fed News Agency': Emphasizes High Inflation Zero Tolerance But Does Not Hint at Rate Path"

Original Author: Dan Li, Wall Street News

Fed Chair Powell's congressional monetary policy hearing "debut" unveiled his "Fed New Policy Manifesto," which did not give any signals on the market's most concerned interest rate cut or hike, but instead repeatedly emphasized restoring price stability, maintaining Fed independence, and promising advance and full communication on future balance sheet adjustments.

Reporter Nick Timiraos, known as the "New Fed News Agency," believes that Powell deliberately avoided making any hints about the future rate path that day and instead focused the hearing on reiterating the Fed's long-term inflation control goal.

Just before the hearing, the U.S. released June CPI data that was below market expectations, further fueling market speculation that the Fed would ease policy faster. However, Powell played down the significance of this data, stating that he does not believe the inflation mission has been accomplished.

Timiraos pointed out that Powell did not use this inflation data to release any future policy inclinations, nor did he reveal the rate path for the July meeting or beyond. Instead, he insisted that the Fed has two policy tools, interest rates, and the balance sheet, and will decide how to use these tools in the future based on economic data to achieve the price stability goal.

Bloomberg, on the other hand, believes that this hours-long hearing actually outlined the "New Fed's" policy framework: adhering to monetary policy independence, sticking to the 2% inflation target, rejecting the notion that employment and inflation can only be a binary choice, while also leaving room for future balance sheet reform and central bank governance reform.

Driven by Powell's hawkish speech, U.S. bond yields retraced some of the decline seen after the CPI announcement during the Powell hearing, and the U.S. dollar index narrowed by about half of the decline seen after the CPI announcement.

Five Key Signals: Powell's First Congressional Testimony Outlines "New Fed" Policy Framework

· Reaffirmation of Continued High Inflation "Zero Tolerance," Asserting that One CPI Decline is Insufficient to Declare Victory in Deflation

During the hearing, Powell emphasized the Fed's "zero tolerance" for continued high inflation. He stated that the Fed has not been able to achieve the 2% inflation target for several years, so restoring price stability remains the most important policy task at present.

Facing the June CPI data released that day, which was significantly below market expectations, Powell said: "Some may say the mission is accomplished, I do not see it that way."

Timiraos believes that Powell reiterated the long-term inflation goal that day, without adjusting policy stance due to improved monthly data, highlighting his desire to prevent the market from interpreting a single inflation data point as a signal of an imminent shift in monetary policy.

· Did not disclose any rate path, emphasizing actions will still be data-dependent in the future

Regarding the market's most concerned next rate action, Powell has always remained cautious.

Timiraos pointed out that Powell did not hint at the policy direction of future Federal Open Market Committee (FOMC) meetings, nor did he answer questions from the market about when rates might be adjusted. Instead, he emphasized that the Fed has two tools, rate policy and balance sheet policy, and will determine whether and how to use these tools based on future economic data.

However, Powell also revealed that in the near future, he will discuss with his FOMC colleagues whether and when to use policy tools and described that there may be a "family fight" at that time.

Bloomberg believes that this statement indicates that although Powell did not provide clear policy guidance, his overall tone remains hawkish, showing that he is unwilling to easily signal easing until confirming that inflation has consistently returned to target.

· Employment and inflation are not a "cruel choice"

In response to questions from lawmakers about the Fed's dual mandate, Powell denied the existence of a so-called "cruel choice."

He said that as long as price stability is restored, the U.S. economy can continue to grow, and businesses can continue to expand hiring. Therefore, controlling inflation and achieving full employment are not conflicting but mutually reinforcing.

This statement further reinforces his policy philosophy that price stability itself is the foundation for long-term employment growth and economic prosperity.

· Balance sheet reform will be telegraphed in advance and will not suddenly impact the market

Balance sheet reform has been a key reform topic since Powell took office.

However, at this hearing, he stated that he was unwilling to preempt the conclusions of the balance sheet reform working group that is ongoing.

At the same time, he pledged that if there are future adjustments to balance sheet policy, the Fed will communicate extensively with the market in advance to ensure investors have sufficient expectations and will not take sudden action.

Powell once again emphasized that the Federal Reserve's balance sheet should serve monetary policy, not fiscal policy.

Reuters believes that this statement helps alleviate concerns in the market that the new round of tapering reform may proceed too quickly, and also implies that the Fed will pay more attention to policy communication and managing market expectations in the future.

· Emphasizing the Independence of Monetary Policy Receives Positive Response from Bipartisan Lawmakers

In response to questions from lawmakers, Powell once again emphasized that the Fed will maintain independence in formulating monetary policy, committing to ensuring that interest rates are not influenced by political factors.

Senior congressional reporter Steve Dennis believes that against the backdrop of Trump's ongoing public pressure on the Fed to cut interest rates, some Democratic lawmakers have chosen to publicly support Powell's stance in maintaining the central bank's independence, reflecting subtle changes in bipartisan views on this issue.

Powell's Testimony Strengthens Data-Driven Policy Communication Framework

How is Powell's testimony perceived by the market? Overall, Powell's comments have not altered the short-term interest rate outlook but have reinforced the new communication framework of "data-driven policy."

Timiraos believes that the most significant feature of Powell's testimony this time is that he purposely did not release any signals about the interest rate path.

Faced with a lower-than-expected CPI report, Powell did not discuss whether the next step would be a rate cut, nor did he provide any forward-looking guidance. Instead, he consistently elaborated on restoring price stability, Fed independence, and policy tools, maintaining his communication approach since taking office to avoid committing to a single set of data or a single meeting.

Bloomberg, on the other hand, believes that the testimony further outlines the policy tone of the Fed under Powell's leadership: 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 future Fed policy will still heavily rely on data performance rather than a predetermined rate path, and the market will also pay more attention to how Powell will implement this concept into actual FOMC decisions in the coming months.