Powell himself is facing a Senate vote in the coming weeks that will secure him a second term atop the central bank, a hurdle he’s expected to clear despite the delicate timing.
Here’s what to listen for at his 2:30 p.m. press conference:
How much will the Fed raise interest rates this year?
Central bank officials won’t put out another quarterly projection for rate hikes until their next meeting in March. But investors are expecting four increases in 2022, including one at that next meeting, and Powell will have plenty of opportunity to signal whether they’re on the right track. Those expectations have fueled turmoil in the stock market, with the benchmark S&P 500 tumbling more than 9 percent this year, as of the market close on Tuesday. But declines in stock prices, in and of themselves, won’t bother the Fed if they’re just a reflection of investors preparing for what’s to come.
What to watch: Powell is likely to highlight the Fed’s mantra of data dependency — acting only in response to what economic reports show. The actual level of rate increases will depend on how inflation behaves throughout the year and whether it starts to come down from its nearly four-decade high of 7 percent last month. But one question is how strongly he will leave the door open to even more aggressive action. Speculation that rate increases could be steeper and more frequent, or that the Fed will soon start shedding some of its $9 trillion in assets has rattled some investors.
What will be the Fed’s strategy for raising borrowing costs?
The central bank increases interest rates by making it more expensive for firms to get short-term funding from banks. But the institution can also more directly affect longer-term rates (think 10- or 30-year loans like mortgages) by buying and selling assets. For now, the Fed is still purchasing billions in U.S. government debt and mortgage-backed securities each month — a move that helps keep rates low — but it plans to stop doing so by March. Two questions follow: How quickly will the Fed pivot to letting its asset holdings actually shrink, and how would it do so?
What to watch: The Fed isn’t expected to lay out a specific plan for its balance sheet this week. But Powell would want to give markets notice if it plans to start shedding assets relatively soon. The method matters here too: Will the central bank just let some of its bond holdings expire without replacing them or might it actively sell some of those securities, which could help bring rates up more quickly?
What will tightening mean for the job market?
The point of raising interest rates is to rein in spending to tamp down inflation. The current price surges have appeared because of skyrocketing demand that has overwhelmed supply amid production and shipping delays. But healthy consumer demand is also key to any economic recovery. A crucial question is how much higher rates will slow hiring and wage increases.
What to watch: Powell has been upbeat about how rapidly the labor market has healed, with unemployment dropping to 3.9 percent in December, not far from the pre-pandemic low, and a record 6.4 million jobs being created in the past year. How will he talk about the potential tradeoffs for workers as the Fed considers ramping up borrowing costs?
What more will Powell say about the latest Fed ethics scandal?
Powell’s No. 2 resigned earlier this month, two weeks earlier than his term was scheduled to end, in the wake of renewed questions about his trading activity. Then-Fed Vice Chair Richard Clarida quietly admitted last month that he had failed to fully disclose financial transactions in February 2020, and the correction suggested he was actively trading even as the central bank was considering whether and how to cushion the economy at the onset of the pandemic. His departure came after two regional Fed presidents earlier resigned amid questions about their trading activity in 2020, while the central bank was engaged in an extensive rescue of financial markets.
What to watch: The central bank late last year announced new conflict-of-interest rules that will prohibit Fed policymakers and senior staff from active trading and only allow them to purchase diversified investment vehicles like mutual funds. But those rules have not been formally released. The Fed also has not provided any statement on the propriety of Clarida’s transactions.
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