Semiannual Monetary Policy Report to the Congress

Fed Chair Powell adopts a hawkish tone in the face of noisy economic data

  • While the main message in Fed Chair Jerome Powell’s semiannual Monetary Policy Report to the Congress was unchanged from recent Fed communication, the tone and structure of the testimony had a hawkish tilt.
  • Given the Fed’s extreme data dependence, the fact that noisy January data is not fit for policy calibration and the fact that most policymakers have retained a hawkish bias in their recent communication, the odds now clearly favor a June onset of the policy easing cycle, rather than a May onset as had been our base case for the past year.
  • We’re therefore shifting our rate cut call to June, but we maintain the Fed will proceed with 100 basis points of cuts this year.

Powell reiterated the now-familiar message that the policy rate is likely at its peak and that it would likely be appropriate to start easing policy “at some point this year.” And while he acknowledged the “notable” easing of inflation over the past year, Powell stressed that the economic outlook remains uncertain and progress toward the 2% inflation target is “not assured.”


This is likely an allusion to the noisy January data — much less than a signal of the future direction of travel of inflation, the noisy January Consumer Price Index, Producer Price Index and personal consumption expenditures inflation reports underscore the uncertainty regarding the pace of progress toward 2%.


Powell noted the two-sided risks of easing monetary policy too soon or too late, but he didn’t state those risks were balanced, and he started with the former noting that “reducing policy restraint too soon or too much could result in a reversal of progress we have seen in inflation and ultimately require even tighter policy to get inflation back to 2%.”


To be sure, the Fed appears well aware of the potential risks to the economy of unduly delaying the easing of monetary policy toward a more neutral stance with Powell noting that “reducing policy restraint too late or too little could unduly weaken economic activity and employment.”


Powell also reiterated the negative conditionality sentence contained in the January 31 policy statement, saying the Federal Open Market Committee doesn’t anticipate cutting the federal funds rate “until it has gained greater confidence that inflation is moving sustainably toward 2%.” Reiterating this sentence five weeks later seems to further reduce the possibility of an imminent rate cut.


There wasn’t much market reaction to the testimony with investors looking to parse through Powell’s exchange with senators today and House Representatives tomorrow. The yield on 2-year government notes is hovering around 4.55% with investors pricing just over three Fed rate cuts this year with the onset of the easing cycle in June. The odds of a May rate cut are around 20%.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.