NEW YORK (Reuters) - The Federal Reserve is "strongly committed" to bringing down inflation that is running at a 40-year high and policymakers are acting "expeditiously to do so," U.S. central bank chief Jerome Powell said on Wednesday.
"It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all," Powell said in a prepared remarks for a hearing before the U.S. Senate Banking Committee.
In a question-and-answer session, Powell declined to rule out a 100 basis-point rate hike, saying he would not take any specific size of rate hike "off the table" as the central bank works to contain inflation. He also said a soft landing for the U.S. economy will be challenging. [nW1N2WO016}
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STOCKS: U.S. stocks posted gains in the three major indexes.
BONDS: U.S. Treasury 10-year yield fell to the lowest since June 10, remained in a range.FOREX: The dollar index fell 0.3% on the day.
KATHY LIEN, MANAGING DIRECTOR AT BK ASSET MANAGEMENT, NEW YORK
"One of the most important comments that Powell made today is that dollar appreciation is one of the channels through which the Fed hopes would tighten financial conditions. It's certainly an endorsement of further dollar strengthening to think that there won't be any type of moves to ease the dollar's gains."
"Overall, you're seeing two things: Powell is giving the greenlight for further dollar strength against the Japanese yen, but at the same time the Fed's resolve is increasing bets for stronger moves by other central banks."
ELLIS PHIFER, MANAGING DIRECTOR, FIXED INCOME RESEARCH, RAYMOND JAMES, MEMPHIS, TENNESSEE
"In Chair Powell's comments today, he said the 'American economy is very strong and well positioned to handle tighter monetary policy' and added that a recession is 'certainly a possibility. It is not our intended outcome at all.' I agree that the economy remains strong and that the Fed always wants a soft landing, and never intends a recession, but a recession is the typical economic outcome."
"Chair Powell also added that the events of the past few months have made it 'more difficult for us to achieve' a soft landing. The Chair reminded us that the Fed's current focus is to restrain demand. Chair Powell's confidence in crushing inflation and engineering a soft landing has all but evaporated. The comments are now focused on keeping inflation expectations anchored so consumer behavior does not take a dramatic shift."
"The Fed can only do so much. While I expect inflation to moderate over time, if it does not, the consumer will shift behavior no matter what the Fed says. The recession chorus also hit oil hard as a recession indicates demand destruction. I am less inclined to expect the energy situation to be remedied so easily."
THOMAS SIMONS, MONEY MARKET ECONOMIST, JEFFERIES, NEW YORK
"I'd say that he's slightly more vague than he was at the FOMC meeting last week. Last week it was pretty clear that they were either going to go 50 or 75 (basis points) in July and that was kind of the playbook for the next couple of months, is pretty aggressive combat against inflationary pressures. But here it's just like well, we'll look at the data, we'll see what's appropriate. I do think that when we get the June CPI that the data will be consistent with another 75 basis-point hike, but this is definitely not the sort of unconditional do whatever it takes commitment to fighting inflation that maybe would have been expected here as a follow up."
"It's the dovish side of very hawkish. It's a little bit less clear and a little bit less than totally committed… It's clear that the Fed knows that inflation is a problem, they know they need to get their hands around it and rate increases are the only real tool that they have to do that. But there isn't this we'll do whatever it takes ironclad commitment that you might expect would be the predecessor to perhaps really aggressive rate hikes that might lead to a rapid decline in output.
"This is kind of like, well you know, we'll look at the data, if demand falls off maybe that suggests going slower with rate hikes. They both are paths towards higher rates it's just a question of how high and how fast do you get there, and today’s comments I think are a little bit on the lower side of that debate."
PAUL NOLTE, PORTFOLIO MANAGER AT KINGSVIEW INVESTMENT MANAGEMENT IN CHICAGO
"It's interesting because he (Powell) reiterated what he was talking about in the press conference after the Fed meeting last week, and their goal of getting inflation back down to 2%. He thinks he can do that without incurring a recession. It's going to be difficult, because 80% of the inflation is coming from food and energy, which the Fed has no control over."
"The market reaction is going to come from Q&A period. The markets digested his statement, which is not significantly different than last week - he is very hawkish, interest rates are going higher. The market is trying its best to reconcile the Fed and the economy. The Fed has declared that the economy is strong enough to withstand interest rate hikes. Historically that has not been the case."
"The selloff will last until the Fed is done raising rates and that could last most of this year or at least getting close to the midterm elections so maybe until September, October, November. These comments solidify expectations of rate hikes at the next two meetings."
JOE MANIMBO, SENIOR MARKET ANALYST, WESTERN UNION BUSINESS SOLUTIONS, WASHINGTON
"Mr Powell's remarks, while hawkish, didn't alter the outlook for continued rate hikes into next year and kept the door open to rate cuts by 2024. The outlook calls for significantly higher interest rates but that's coming at the risk of slower growth and the potential for easing in two years. Overall, the outlook continues to look very dicey for growth."
MICHAEL PEARCE, SENIOR U.S. ECONOMIST, CAPITAL ECONOMICS (VIA EMAIL)
"The opening statement from Fed Chair Jerome Powell ahead of his semi-annual testimony to the Senate Banking Committee this morning added little to what he said in last week's post-FOMC press conference. But his continued emphasis on the need for 'compelling' evidence that inflation is falling suggests officials will repeat last week's larger 75-bp hike at the next FOMC meeting in July."
TIM GHRISKEY, SENIOR PORTFOLIO STRATEGIST, INGALLS & SNYDER, NEW YORK
"The (prepared) comments were fairly broad. Like all Fed commentary, there are positives and negatives, but the overall message is the Fed is not backing away from rate hikes. Powell said there's some positive indicators and negative indicators, but they are firm that the Fed is going to continue to raise the fed funds rate."
"The market is down at the open in reaction to yesterday's strength. There's nothing that drove yesterday's (rally) other than oversold conditions."
"Today, (Powell is) saying that while there's evidence that inflation is coming down, he remains committed to bringing down inflation and I don't see any evidence that the fed won't hike rates back to the so-called 'normal' level."
"He's sensitive that higher rates are going to hurt parts of the economy, but it's needed to create price stability."
"It takes some pain to put the economy on solid footing."
"He's also saying there are favorable conditions out there, strong labor market, solid consumer demand. The issue here is inflation can be insidious, and the Fed is determined to bring inflation down to 2% which is their long term average target."
(Compiled by the Global Finance & Markets Breaking News team)