The testimony of Federal Reserve Chair Jerome Powell to the Senate Banking Committee on Tuesday was less optimistic about inflation than his previous statements to central bankers, according to Mohamed El-Erian, the Chief Economic Advisor at Allianz.
What Happened: El-Erian took to social media platform X, to share his insights on Powell’s remarks. He noted that Powell’s written statement to the Senate Committee on Banking, Housing, and Urban Affairs characterized inflationary developments as “hav[ing] shown some modest further progress.”
This was “less reassuring” than what Powell had conveyed to other central bankers a week earlier, where he had mentioned, “the disinflation trend shows signs of resuming.”
El-Erian suggested that the change in tone could be attributed to the different audiences rather than a significant shift in Powell’s view.
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Why It Matters: Former U.S. Treasury Secretary Larry Summers recently criticized the Federal Reserve’s optimistic stance on inflation, warning that the central bank is underestimating the long-term interest rates necessary to curb inflation. Summers dismissed the recent data indicating a slowdown in inflation as a temporary effect of post-pandemic price normalization.
Additionally, during his semiannual testimony before the Senate Banking Committee, Powell reiterated that a policy rate cut would not be “appropriate” until the Fed gains greater confidence that inflation is heading sustainably toward 2%. He stressed that reducing policy restraint too soon could stall or even reverse the progress made on inflation. Powell’s cautious stance aligns with his previous statements that an unexpected weakening in the labor market could lead to lower interest rates.
In a recent interview, El-Erian suggested that the Federal Reserve should consider a rate cut in July if the PCE inflation data is favorable. However, he expressed skepticism about the likelihood of this happening, pointing to disagreements regarding inflation dynamics.
El-Erian noted that the economy is slowing down more rapidly than anticipated, suggesting that the central bank should consider earlier and faster rate cuts.
Investors are eagerly awaiting the June Consumer Price Index report to strengthen their expectations of interest rate cuts. Despite Powell’s reiteration that it won’t be appropriate to cut the federal funds rate until policymakers obtain “greater confidence” inflation is heading unequivocally toward the 2% target, market expectations currently place a high conviction on a September rate cut.
Fed futures indicate a 71% chance of a rate cut at the Sept. 18 Fed meeting and factor in 50 basis points of rate reductions by year-end.
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This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote
