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tv   Bloomberg Markets Americas  Bloomberg  March 2, 2022 10:00am-11:01am EST

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the world, this is "bloomberg markets," with alix steel and guy johnson. ♪ kailey: it is 30 minutes into the u.s. trading day on wednesday, march 2. war rages on. ukraine says it may hold a second round of talks with russia as the invasion intensifies. president biden gives his first state of the union address, labeling vladimir putin a dictator. commodities hit new highs, supply shortages send futures to the highest since 2008. oil jumps above $110 a barrel as opec looks through special risk. powell and the hot seat. the chair will testify in the hot seat this hour. he will tell lawmakers he sees great liftoff this month while
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geopolitics cloud the outlook. from new york, i'm kailey leinz with guy johnson in london. alix steel is off. welcome to "bloomberg markets." chairman powell going to speak any minute now. the background now, geopolitics. guy: but he is making it very clear that the fed is still on track to deliver rate hikes. that is something we are going to be seen very shortly. but he did lay out the fact that we live in a much more uncertain time. i think that is probably less of a problem for the fed, more of a problem for the ecb right now. we have seen huge gyrations in european government bonds. so we will be listening to every word that chair powell has to say, not only today, but also tomorrow. events are unfolding very quickly. maybe we will see a finessing of the speech day one today to -- day one to day two.
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ukraine saying it may hold a second round of talks with russia as the country's defense ministry said its forces have captured a ukrainian black seaport north of crimea, the russian defense ministry, of course. president biden used his date of the union speech -- his estate of the union speech to warn putin for the hype price -- the high price he would face for invading ukraine. pres. biden: he badly miscalculated. he thought the world would roll over. instead, he met the strength he never anticipated or imagined. he met the ukrainian people. guy: bloomberg's washington correspondent annmarie hordern joining us now from the white house. was this a speech that delivered on expectations? was this a speech that delivered on the objective of unifying america? annmarie: it delivered in terms of unifying the chamber when it comes to finding a geopolitical
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-- to fighting a geopolitical foe, russia, getting the chamber to stand in a show of solidarity, everyone clapping and looking at the woman who stole the show, the ukrainian ambassador to the united states. that is where the president really won that bipartisan support, but that part of the speech was just a little bit less than 10 minutes. the remainder focused on domestic issues. but one of those domestic issues has to do with the geopolitical crisis he is dealing with, which is the war in ukraine, and the premium it is putting on commodities across the board. it is also wheat, corn, nickel, palladium. all of this feeds into the inflation story. kailey: all feeds into higher prices for americans. he went on to say that he is taking great effort to make sure that the sanctions hurt the russian economy, not the u.s. economy, saying that price pressures are his number one focus. that is the case, is that a
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indication that he has basically gone as far as he is going to go here? annmarie: it does sound like it because he and adminstration has said they have these so-called carveouts for the energy sector. they want to make sure russian crude stays on the market so that it does not hit consumers in america or europe or around the world, but it hits the russian economy, which we should note, it is the longest stretched that the ruskin -- that the russian moscow exchange has been closed. if you look at the way some of these banks are trading, it is literally a penny or two. so he is hitting the russian economy. but the issue is individuals in the market, people potentially do not know when they should touch, can they touch russian crude. you can see that for russian oil . it was down as much as almost $20 to the brent benchmark, and still individuals do not want to pick it up. if you go to pick up russian crude come on the shipping, it is about 300% more.
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refiners don't want to touch it either. potentially this is not just about the fact that they are not sure about how they are going to make those transactions, but also from a moral standpoint, what does this mean for the reputation? kailey: reputational risk, financial risk, maybe some self sanctioning going on across the board. elsewhere in washington, d.c. come on capitol hill we are awaiting fed chair jay powell's semiannual testimony before the house financial services committee. you are looking at a live shot of that hearing. committee chair maxine waters is giving the opening remarks. we are joined by bloomberg international economics and policy correspondent michael mckee, as well as rbc capital markets equity derivatives strategist. we've already gotten chairman powell's opening statement. he talked about a strong labor market, that he sees liftoff this month. does he sound hawkish to you? michael: it is all relative, i guess. he sounds relatively hawkish for
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where he has been, compared to some other numbers of the committee, but he is still to the dovish side. he comes out and says with inflation well above the 2% target and a strong labor market, we expect it will be appropriate to raise the target rate and the federal funds rate at our meeting next month, but he does not say by how much he would raise it. jim bullard, who is a voting number of the committee, said just a short time ago in a speech he is making that the fed still needs to go 50 basis points. so they are clearly not united at this point. there will be a lot to talk about at the may 15, 16 meeting. guy: a lot of uncertainty to factor into their thinking. let's talk about the uncertainty . chair powell referencing it. the market hates it. uncertainty incredibly difficult to deal with. it is not risk. it is not quantifiable. how good is the market at
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hedging geopolitical risk? amy: i would say the market is terrible. prior to this geopolitical risk being on the table, the options market was doing a fairly decent job of pricing where they thought the fed dot plot could be. essentially, options investors have said we have no idea what is going to happen in march in the context of what is happening in ukraine. essentially, people are taking hedges that are new and saying, look, this is going to be highly uncertain for a long time. we don't know what happens in march anymore, so we are going to go down the line and say that uncertainty continues for the next few months. kailey: they are pushing out their hedges. how expensive are those hedges? amy: when you look on a percentile basis, three years, one year, five year, what have you, they are all at historical
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highs. sometimes it is important to compare them to other markets. what i will tell you is if you look at the fixed income market, the volatility levels are hitting essentially the march 2020 peaks, and we are nowhere near that in the equity volatility market. we have a 33 on the vix or so, but this hit 80 in march 2020, so i thing the equity volatility still has a long way to go up, despite how everything looks pricey on those percentiles. guy: the fed has retreated from forward guidance over the last few months. it is much more opaque now in terms of the guidance it is providing. we have, as you have just laid out, little clarity over whether we get a 25 or a 50 basis point hike. given the fact that we have this geopolitical uncertainty right now, do you think the fed is going to want to be a little bit more careful in terms of the guidance that it divides, it -- that it provides?
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michael: i think you've got both points right, but in the opposite order. the fed is going to want to have as much choice optionality as it can possibly get, so powell will try probably do not let any what he -- let anybody pin him down about what they are going to do and how often they are going to raise rates. but they don't want to raise rates to quickly. they may not need to. interesting comment from jim bullard a few seconds ago saying that the market is going to price the ukraine risk for the fed because they are going to have their finger on what kind of damage it is going to do. obviously markets are pricing europe in a lot more shape at the moment. kailey: you were talking about how we are all focused on the hikes, whether they move 25 or 50 basis points, how many times they move this year. about the balance sheet? how is that may be adjusted in
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relation to some of the uncertainties they are faced with? michael: they probably have not change their views on that at all. the problem for the balance sheet reduction is the fed does not have a good mathematical model of what the impact of a falling balance sheet is on financial markets in terms of what does it mean compared to raising or lowering interest rates. so they do want to raise rates first. that will be their primary tool. they know the balance sheet has to come down, so they will start lowering it, but they don't look at shrinking the balance sheet as a particular tool of monetary policy, more a rightsizing. they will know they get there when the market starts to react in 2018. guy: do you see any sign of stress in the system right now? is this a market functioning properly? there have been concerns about the funding markets, but from what you see in front of you, is this a relatively normal situation that we find ourselves with from a market perspective,
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not from a geopolitical perspective? amy: as far as the equity options market goes, it is still functioning in an orderly way. i think the liquidity on the rates volatility side is very different right now. this is a little morbid to think about, but when using about the real tail risk in the equity market right now, it is nuclear war. there is simply no way for the equity options market to price that because the reality is if that happens, there is no equity options market to price. so in some ways, the equity options market has to be more sanguine. you see that in the normal functioning of both volatility, as well as options volume. kailey: obviously the abundance of it is what fueled a lot of the retail activity we have seen over the last two years. a lot of that has been buying bullish call options. now we are starting to see them
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pursuing put options. that pointed out over at sundial research. how does the retail trader influence what these markets are doing right now? amy: it is interesting because after two years of buying out the money and call options and meme stocks and what have you, that sentiment has shifted. i would say it is not just retail institutions that are also buying to a large degree. one technical aspect we have to continue to watch in the options market is what happens when that hedge monetization occurs. when the hedges close, you can get support to the market. this is what happened last week between wednesday and thursday. there was a great amount of hedges actually be enclosed, which forced the dealers to essentially cover the shorts they had on, which provided a little bit of that turnaround we saw in the markets last week. normally we would say retail, who cares, they are a small
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portion of the market. we have learned in the last two years that is not true. they can have significant impact. so when you see that snowball on institutional trades, you better watch for those changes in support in gamma as well. guy: what is happening with single stocks right now in terms of the news we are seeing? there are a bunch of stocks that are directly affected by what is happening here. some of them are in europe. some of them are in the united states. anything with russia exposure is being whipsawed right now. what are you seeing in some of those single names? amy: we actually had a conversation about this with our team this morning. there's very little appetite from investors and clients to listen to anything about single stocks right now, even if they are related, like energy. it is a very macro world, and when it is geopolitical headlines all the time, the reality is correlations feel very close to one. so a lot of the equity is your
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proxy etf's, your indices, and even if there are earnings coming, people aren't is focused on those single stock names. however, i think as these continued announcements come for the esg related sanctions or companies to do things related to russia, i think you are starting to see that divergence again as the new slow happens. kailey: amy talking about the macro picture. let's talk about the economic data. how much could what powell says today actually not truly reflect the move they make in two weeks from now because they have not seen that data yet? michael: i think they know pretty well what the data are going to look like in general terms. we know that inflation is high and everybody forecast is for it to go up in the next cpi. so the fed is going to be looking at that not so much for
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with the headline number is, but for what the composition of it is and whether it represents the fed's view, isaacs pressed by powell in his opening statement, that they think has the -- as expressed by powell and his opening statement, that they think has happened. guy: we are kicking things off on capitol hill. thanks to mike mckee and amy wu silverman of rbc capital markets. let's listen to jay powell give his semiannual testimony before the house financials of this committee. chair powell: we pursue these goals based on data and objective analysis and were committed to do so in a clear and transparent manner so that the american people and representatives in congress understand are policy actions and can hold us accountable. i will review the current economic situation to monetary policy. economic activity expanded at a robust 5.5% pace last year, rich progress on vaccinations in the reopening of the economy, as
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well as monetary support and the healthy financial positions of households and businesses. the rapid spread of the omicron variant led to some slowing in economic activity earlier this year, but with cases having declined sharply since mid-january, the slowdown seems to have been briefed. the labor market is extremely tight. unemployment rose by 6.7 million in 2021 and job gains were robust in january. the unemployment rate declined substantially over the last year and stood at 4% in january, reaching the median fomc estimates of its longer run normal level. labor demand is very strong, and while labor force part of the patient has picked up, labor supply remains subdued.
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an unprecedented number of workers are quitting to take new jobs and wages are rising at their fastest pace in many years. inflation increased sharply last year and is now running well above our longer run objective of 2%. demand is strong, and bottlenecks and supply constraints are limiting how quickly production can respond. these disruptions have been larger and longer lasting than anticipated, exacerbated by waves of the virus and price increases are now spreading to a broader range of goods and services. we know that the best thing we can do to support a strongly but market -- to manage risks that
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could impede the attainment of its goals. we will continue to assess market conditions, inflation expectations, and financial and international development. we continue to expect inflation to decline over the course of the year as supply constraints ease and the removal of monetary policy accommodation, but we are attentive to the risks of potential further upward pressure on inflation expectations and inflation itself from a number of factors. we will use our policy tools as appropriate to prevent higher inflation from becoming entrenched while promoting a sustainable expansion and strong labor market. our monetary policy has been adapting to the evolving
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economic development. we expect it will be appropriate to end the target range for the federal funds range in our meeting later this month. the process of removing policy accommodation intern circumstances will involve increases in the target range of the federal funds rate and reduction in the size of the fed balance sheet. as the fomc noted in january, the fed funds rate is our time remains of adjusting the stance of monetary policy. reducing our balance sheet will commence after the process of raising interest rates has begun and will proceed in a predicable manner, primarily through adjustments to reinvestments. the near term effects on the of us economy of the invasion of ukraine and events yet to come remain highly uncertain, making appropriate monetary policy in
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this environment requires a recognition that the economy evolves in unexpected ways. we will need to be nimble and responding to incoming data and the evolving outlook. maintaining the trust and confidence of the public is essential to our work. last month we finalized a conference of set of new ethics rules to substantially strengthen investment restrictions on senior federal reserve officials. these new members -- these new rules will guard against -- we understand our actions affect communities, families, and businesses across the country. everything we do is in service to our public mission. we at the federal reserve do everything we can to achieve our maximum employment and price stability goals. thank you. i look forward to your chance -- to your questions. rep. waters: thank you very much. i now recognize myself for five minutes of questions. chair powell, as you know, the
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fed is required to conduct monetary policy in a manner that fulfills its dual mandate to promote maximum employment and stable prices. as you have explained, most of the inflation we are experiencing right now can be traced back to supply chain issues related to the pandemic, and the fed cannot directly affect supply side conditions. these supply chain constraints seem likely to significantly increase as russia invades ukraine. the full effect of our sanctions take hold. if the feds tools are mostly useful in stimulating or constraining demand, how can we expect monetary policy to rein in inflation that is largely driven by supply-side actors?
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chair powell: our policies really cannot, as you point out, affect supply side conditions. our policies affect manned. what we are facing now is an elevated level of demand in the face of supply-side constraints, and it is those two things which is creating inflation, so it is an important job for us to move away from these very highly stimulative monetary policy settings to a more normal level of rates and perhaps tighter at a time when inflation is highly elevated, and that is with the committee plans to do. rep. waters: it seems clear the fed has limited tools to engrave -- to embrace inflation in the fed has an important role to play. the monetary policy report notes major shortages in housing supply as a factor in high prices. if congress were to make investments to leave be eight -- to alleviate these shortages which do using this would be helpful in addressing inflation? chair powell: major investments
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in housing supply? i think housing prices are high for a number of reasons. difficult he and getting lots, materials, difficulty in finding workers, very high demand that has been asked ordinary high. those are many of the features, and also low interest rates have made credit widely available. mortgage rates are going up. that will probably begin to cool off demand. i would not want to comment on congressional legislation, but i do think there is no doubt a role for congress. rep. waters: i suppose i could conclude, without having you comment on fiscal policy, that you agree there are ways to manage inflation outside of monetary policy. it is not only monetary policy, that others have a role to play. chair powell: i do think that is
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right, but more in a medium to long-term since. the fed does monetary policy and inflation is largely a monetary phenomenon and a tool that can be used to address inflation. over time, anything that expands the productive capacity of the united states would in principle make greater potential output and a less constraining economy. rep. waters: said forecasters expect inflation will subside as supply chain disruptions issues are resolved. however, housing and rent prices account for roughly 1/3 of the consumer price index and most economists do not expect the problem to be resolved as quickly as supply chain bottlenecks due to both the time it takes to develop housing and the lack of investment in housing that is affordable to low and moderate income families. currently there's a shortage of nearly 700 rental homes that are
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available to america's lowest income renters and a shortage of more than 5 million homes for potential homebuyers. in my district there is a shortage of more than 34,000 rental homes that are affordable and available to the lowest income families, while the state of california has a shortage of more than 962,000 affordable rental homes. if congress does not make the investment to increase supply and access to the affordable homes in this country, how concerned are you that the fed will not be able to contain inflation? chair powell: you are right that housing inflation is a significant part of the cpi. we also look more prominently at personal consumption, pce, which is a different measure. unlike these temporary supply-side constraints that we see, housing inflation really is much more of an indicator of the tightness of the economy rather
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than supply-side problems, so something we watch carefully, along with wages, and it is a major contributor to inflation. as i mentioned, higher interest rates, housing is a very interest sensitive sector and higher interest rates, interest rates that move back towards a more or more level should act to cool off the housing market over time. rep. waters: thank you. the gentleman from north carolina, mr. mchenry, the ranking member of the committee, is now recognized for five minutes. rep. mchenry: thank you. chair powell, thank you for your leadership in tumultuous times. these are challenged times internationally. everyone else on the open market committee, it seems, has opined about the march meeting. everyone, whether it is a tweet or interview or anything else. what are your thoughts going into the march meeting? chair powell: the march meeting? here's how i am thinking about
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the march meeting. i guess i would start, of course, with the u.s. economy, which is very strong, the labor market extremely tight, inflation running well above target. the way we think about our work is we develop working plans for making adjustments to monetary policy over the course of the coming months, and then we are flexible as plans meets the real world. at a time like this, what we aim to do is lay out our principles with whatever clarity we do have and proceed to implement some -- implement them. so before the ukraine invasion, the committee was set to raise our policy rate, the first of what was to be a series of raises inspected this year. decisions would be based on incoming data and the evolving outlook. i also expected we would make great progress on our plan to begin to shrink the balance sheet. the question now really is how the invasion of ukraine, the
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ongoing war, the response around the world, including sanctions, may have changed that expectation. it is too soon to say for sure, but for now, we will proceed carefully along the lines of that plan. the thing is, the economic effects of these events are highly uncertain. so far we have seen energy prices move out further, and those increases will move through the economy and push-up headline inflation, also way on spending. the thing is, we can't know how large or persistent those effects will be. that simply depends on events to come. so that is where that leaves me. i do think it will be appropriate to raise our target range for the federal funds rate at the march meeting in a couple of weeks, and i am inclined to propose a support of a 25 basis point rate hike.
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we will also write down our new summary of economic predictions -- economic projections of individual forecasts. i also expect that at this meeting we will make good progress towards a plan to shrink our balance sheet. we will not finalize the plan at this meeting. we will do that when we think the time is right at a coming meeting. the bottom line is that we will proceed, but we will proceed carefully as we learn more about the implications of the ukraine war on the economy. we use our tools to support financial stability and microeconomics to plataea. we are going to avoid adding uncertainty to what is already an extra ordinarily challenging and uncertain moment. that is how i would think about it. rep. mchenry: you mentioned 25 basis points. from all of the analysis about what the fed will do over the course of the next year, is 25 basis points the floor, the ceiling? is it the speed limit?
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is that the max that the fed could take on? how do you think of that? chair powell: we have an expectation, those of us on the committee have an expectation that inflation will peak and begin to come down this year. to the extent inflation comes in higher or is more persistently high than that, then we would be prepared to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings. rep. mchenry: you mentioned the balance sheet plan, and that is to come. but what i am hearing clearly from you is that the fed is very interested in financial stability, given what is happening, and you are willing to make quick decisions on the question of liquidity come on the question of market stability . those important works that you have focused on as fed chair. and so this is substantial news
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for the house to be the first, rather than the senate, to break the news, so thank you for your being so forthright about your views on this, and with that, i yield back. rep. waters: thank you. the gentleman from california is recognized for five minutes. >> thank you very much for being with us here once again. as we look at the unprovoked criminal russian invasion of ukraine, one of the most notable national security responses have been the president's recent announcement of how much of the russian financial sector from swift financial services. our eu partners have excluded seven russian banks from swift. what practical effect will this have on russia's economy, its
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financial sector, and its people? chair powell: thank you. i should point out that the fed does not impose sanctions on other countries, that we, in the process of developing these sanctions, we are not a principal. that is a job for the treasury department. we provide technical background support, but i think questions about the sanctions and their effect generally would be more for the industry should and andy treasury secretary. i think you can see that the effects so far appear to have been significant. rep. vargas: we saw what happened to the ruble, what happened to the markets. is a way around it for them cryptocurrency? i know it is a little bit out of your they look, but as you said,
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these are interesting moments in time. we have not had this really since world war ii, and all of the comments you made about watching the markets, so much of it is tied obviously to what the russians are doing with respect to their unwarranted and criminal acts in ukraine. chair powell: i don't have any information as to that, but i think it underscores the need for congressional action on digital finance, including cryptocurrencies. we have this burgeoning industry which has many parts to it, and there is not in place the kind of regulatory framework that needs to be there. it was probably no different with railroads or telephone or the internet, and ultimately what is needed is a framework, and i think in particular, ways to prevent these unbacked
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cryptocurrencies from serving as a vehicle for terrorist finance and general criminal behavior, tax avoidance and the like. so i guess that is what i would say there. i don't really know the extent to which it is happening, although you do hear that and read it in the paper. rep. vargas: could you comment a little bit about the central bank digital currency? it seems like that would be helpful in situations like this. chair powell: we issued a paper after much thought and many drafts, late last year, seeking public comment on the cost and benefits of a potential central bank digital currency issue by the federal reserve here in the united states, digital dollars. i think we gave an extended comment period and we very much look forward to reading those comments. this will be something that we invest a fair amount of time and
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expertise, hiring people and things like that to try to get it right, but also to understand whether the benefits actually outweigh the cost, which i think is an unanswered question here and around the world. nonetheless, it is our obligation to move vigorously to understand the answers to that question so that we can deploy the central bank digital currency if it is appropriate. in principle, it depends on why people are using unbacked digital currencies. if they are using them to evade visibility and evade the law, for us just to have a law-abiding cbdc would not change that. they will still be able to use those currencies for that matter. the existing digital currencies that are not backed are really vehicles for speculation. they are not used in payments. they are not a store of value. they are a speculation like gold. that is what they are used for. whereas potentially a u.s. cbdc
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would have a wider view. i want to stress we have not decided to do it, but we do understand our obligation is to get to the bottom of the technical and the policy issues that need to be answered. rep. vargas: thank you. i would just say from your lips to god's ears that inflation does peak this year and does come down because people are hurting. thank you very much. rep. waters: thank you very much. the gentlewoman ms. wagoner is recognized for five minutes. kailey: we have been listening to jay powell's estimated for -- jay powell's testimony before the house financial services committee. jay powell saying he is inclined to support a 25 basis point hike this march, providing some clarity to a market that was looking for clues on whether that move would be 25 or 50 basis points. powell did leave a potential 50 basis point on the table at some
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point if inflation continues to come in hot, though he says the fed still expects inflation to peak and come down this year, express and support for a 25 basis point move this march. as for how that is translating into the market reaction, we are seeing equities in and around the highs of the session. the s&p 500 up a little more than 1%, but the bond market really where you see a lot of that reaction, specifically at the short end which is more influenced by fed policy. that two-year yield now up around 13 basis points. the 10 year up 7.5 basis points to 1.80%. in terms of the geopolitical situation that paul was talking about, it does not provide clarity to the economic outlook, but is definitely doing something to the oil markets. the bdi crude up -- wti crude up . that is something the fed is watching in terms of the inflation picture. let's get back to chairman jerome powell. chair powell: the committee is
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committed to using our tools to bring it back down to levels of price stability, which is to say 2% inflation. but i would also say that given the current situation, we need to move carefully, and we will. we will be nimble. we will be looking at the situation as it evolves. we use our tools to add to financial stability, not to create uncertainty. rep. wagner: at this point in time, you don't think it significantly alters your expectations for the rate increases you have discussed this year. chair powell: i don't think that is knowable yet. what we like to do is run alternative scenarios, and we have done some of that, as you would expect. it is easy to find cases where it would affect, but we don't know that yet. we honestly don't. rep. wagner: thank you. could you explain the role of the federal reserve in implementing u.s. sanctions on russia, and how you are working on how this is actually implement it -- actually
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implement it -- actually implemented? chair powell: sanctions are part of what the elected government does. we provide that nickel support. we implement those sanctions or make sure that the banks obey them, that we supervise and regulate. that is one thing that we do. we also consult. we have knowledge on financial markets and institutions, so we are providing technical support, but we are not the decision-makers on those things. rep. wagner: what actions has the fed taken to date since the invasion of ukraine? chair powell: i would say first of all, since late last year, we have been on very high alert for cyberattacks. we have not seen any notable incidents yet.
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we are making sure that the banks we regulate and supervise are also on high alert. we communicate with the reserve banks where there is a lot of expertise in these areas and in other parts of the government. that is one thing we have done. as i mentioned, we are in very close contact with the treasury department, as you would expect, between every central bank and finance ministry around the world, but we are not the ones who designed the sanctions. rep. wagner: cybersecurity is certainly, this committee and especially at the fed is a top priority read i am glad you are watching it closely. chair powell, does our u.s. financial system have the necessary capital and liquidity to handle any comic fallout from this war? what kind of data will we be seeing? chair powell: the evidence strongly suggests that the answer to that is yes. just went through a rather enormous shock with the pandemic
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and the near closure of the global economy, and u.s. banks' capital levels are at multi-decade highs, liquidity levels the same. it is hard for me to look at that and say the lack of capital is a threat at this point. there are certainly issues. again, cyber for private financial institutions is a huge issue and one that they spend a great deal of time on, as do we. rep. wagner: the obama administered and blocked the developer and of the keystone xl pipeline, reinstated by the trump administration, and blocked again by the biden administration. would this not lower prices at the gas pump? chair powell: we are not response before energy policy. that is a matter for congress and the administration. of course, the laws of supply and demand do work. rep. wagner: the laws of supply and demand do work.
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i yield back. rep. waters: the gentleman from guam is now recognized for five minutes. rep. sinema: nicholas -- >> i would like to recognize one of my senators from guam. thank you for making time to join us today, senator. [applause] mr. chairman, over the course of the uptick of inflation in the last year, you testified before the committee on multiple occasions that the fed believed the inflation the country was experiencing was transitory. since that time, especially today, there is a seeming change in that tenor. can you elaborate more on that? chair powell: glad to. very widely among macroeconomists and central bank's around the world, we looked at it as akin to an energy shock and a supply-side stock. the textbook on monetary policy
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would have you look through that because a supply shock comes and goes, and by the time monetary policy is having its effect, which happens with long and variable lags comedy supply shock is already gone. so we looked at it that way. i think we expected to get relief, particularly going into last fall, we expect it when schools reopened, vaccinations raised, kids back in school, we expected supply of labor to come in, that kind of thing, and it did not happen. but it did not happen because the supply-side constraints did not ease. so it is not like, as a practical matter, what was wrong was not the theory. it was just in reality, the supply-side constraints have been much more durable and persistent than we expected. we knew that we could be wrong, and i think i always thought that we could pivot pretty quickly and catch up. we did start to pivot in the
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middle of last year and then pivoted hard at the end of last year, but at the time the economy was really healing. record job growth, record decline in unemployment, record tightening in the labor market. so we know what our job is now, which is to move away from these highly accommodative settings to more appropriate settings given the very hot nature of the labor market and the level of inflation. rep. san nicolas: there is chatter, public chatter that the intensity of the inflation we are dealing with today is a reflection of the fed not taking policy actions soon enough, not taking enough policy action, and there is public chatter that causes the fed's credit ability to come into question as to whether or not it is acting responsibly and appropriately with the datasets that are coming in. i bring this up because we have a duty to the american people to
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be able to raise these questions, as pointed as they are, and to give individuals as yourself an opportunity to really speak to the credit ability question -- the credibility question out there. chair powell: it is for others to judge many of the things you mentioned, and we understand that. starting in december at our december meeting, we began talking about significantly more rate increases. the market focus very much on our word, and as the year has gone on, the market participants to appear to be reacting what i would call appropriately to our assessment, our ongoing assessment and reassessment of what is appropriate. i will just assure you and everyone that we are committed to achieving price stability. we will use our tools to achieve price stability. that is an essential bedrock element of everything out we want to achieve in the economy,
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including a strong labor market. rep. san nicolas: when we faced a financial crisis in 2008, a lot was learned about the need to be more responsive to the liquidity traps that could take us by surprise. given the circumstances you are dealing with today and the frustrations the american people are facing, can you share with us any lessons the fed has learned with respect to its responsiveness to the inflation we have been dealing with over the past 12 to 18 months, and the intense inflation we are dealing with today? chair powell: the inflation we are experiencing is nothing like anything we have experienced in age. it is higher, of course, much higher than anything we have seen since i was much younger, but not only that, it is different. is coming from the goods sector. the goods sector has been a source of disinflation for a quarter-century because so many manufacturing goods have been -- rep. san nicolas: but just specifically, what lessons has
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the fed learned from the outcome we are dealing with today? chair powell: we are still living through it, so the main focus we have is not on doing a retrospective. it is on conducting policy appropriately to return us to price stability while also sustaining the expansion. rep. waters: the gentleman's time has expired. the gentleman from georgia mr. lotter milk is recognized -- mr. loudermilk is recognized for five bennetts. rep. loudermilk: thank you for being here, and congratulations on your nomination for a second term. i thing it is well-deserved. i want to hold up something here. this is a ukrainian dollar. i kept some of these when i was in ukraine several years ago doing some ministry work. i think it is interesting to think that what happens in the next few days may determine whether this is another defunct piece of currency and the nation
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returns to a ruble, but you can see it is a fraction of the size of the u.s. dollar. it takes about 30 of these to match the u.s. dollar, but when you look at the values come our dollar has decreased in value due to inflation. a year ago we need testified before this committee, i asked what your outlook was for the economy, and you said you expect it economic growth to be strong the rest of 2021, but at that time i warned that the $2 trillion stimulus bill that was making its way through congress at that time was unnecessary and far too big, given the economy was already recovering. lo and behold, these predictions came true. in your opening statement, you mentioned that you did not expect inflation to continue at the rate it is right now, but i also recall throughout 2021, we
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heard that inflation was going to be temporary, but i also understand that that prediction probably did not include the actions and the roles that congress had, as you said. according to a report from the federal reserve bank of san francisco, because the american rescue plan was so extremely large and was passed when the economy was also recovering, this is a contribute in factor 2 inflation. do you agree with that report from san francisco's bank, that our reckless spending is a contribute in factor 2 our inflation -- factor to our inflation? chair powell: all of the things we did after the pandemic were we turned our dials as hard as we could, so did you, with the c.a.r.e.s. act. the economy did benefit from that. we have the strongest economy in the world now. but part of that, no doubt part
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of what we did and what congress did, without naming any particular laws, is also part of the reason why inflation is high. rep. loudermilk: so there are multiple contribute in factors to that. reckless spending devalues our dollar is one of those. what we heard last night is that there is not going to be a change in the direction this congress is going or the white house. it sounds like we're just going to repeat the same mistakes we made in 22 anyone -- in 2021. you mentioned increasing 25 basis points, and you have mentioned that it may be necessary to go higher. i understand that. do you still think that inflation will be temporary, and i believe you said it would be short-lived going forward because of resolving our supply chain issues? but since there are other contribute in factors to that, are you anticipating that
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congress or the administration will undo some of the failed policies such as the spending policies and the suppressing of america's energy supply, which has been a significant contribute in factor? if congress or the white house does not change the policies of 2021 and continues down that same path, do you still believe that inflation will stabilize, price stabilization will come this year? chair powell: first, we have had this expectation, as you all know, for more than a year, and it has not come true, so we are humble about the fact that we cannot call with any confidence the turn, but it does seem that this year we will be withdrawing policy accommodation. a lot of the fiscal policy spending has happened now, so the impetus to growth will be declining and in fact negative
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from fiscal policy as it stands now. those are things in just the next row -- the natural improvement of supply chain and things like that, those are things we are looking to for relief on inflation, hoping for. very difficult to say when they will happen. our job is to achieve rice stability one way or the other -- achieved price stability one way or the other. rep. loudermilk: i yield back, adam chair -- back, madam chair. rep. waters: thank you. mr. garcia is recognized for five minutes. rep. garcia: thank you for this hearing, and thank you to chair powell for joining us. it has been a challenging year. rising prices at the gas pump and supermarket cause real distress to working-class neighbors like that working-class citizens like my neighbors -- working-class citizens like my neighbors in
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chicagoland. my constituents saw a decade of stagnation after the recession. we simply cannot afford that again. chair powell, you said that inflation has been driven by bottlenecks in the supply chain, and last night, president biden highlighted their role in corporate concentration and price increases. ceos have bragged to investors about their power to raise prices without facing competition, last night, president biden said, and i quote, "lower your costs, not your wages," and my constituents were glad to hear that. last time it was because my neighbors lost their jobs and
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could not find diapers or chickens. so is that the idea? chair powell: the idea is that right now, the federal funds rate is still set close to zero, and that is a very stimulative level. i think it is eight basis points. so that is not an appropriate level, we think, going forward. we think it is appropriate that we engage in a series of rate increases over the course of this year and let our balance sheet shrink. so what will happen over time is demand will moderate as interest rates get into the economy over time, and these annual price increases, everything where prices are going up, will moderate as well. that is how it has always worked with interest rates. we don't do competition policy,
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so i can't really comment on that part of it, but i will say that is how we think about inflation and that is how we use our tools to get inflation under control. rep. garcia: changing gears, we discussed corporate concentration, and last july, the president issued an executive order on competition that encouraged the fed and other regulators to increase scrutiny of bank mergers. it has been a long time since regulators blocked a bank merger , even an acquisition by a globally systemically important bank in 2020. do you think it is appropriate to issue a moratorium on pending mergers while the fed updates its framework for their review? chair powell: i think we have a statute that congress has passed that gives us the rules for evaluating potential acquisitions and mergers by
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banks. i think we have a widely developed framework for that work, and we are continuing to implement that. any changes that would come would either come through legislation or through new personnel at the fed, neither of which we have right now. rep. garcia: as we learned from wells fargo, frontline bank workers are an important resource for regulators. they see first-hand how banks implement or ignore internal controls, and they can identify problems as they develop. incorporating frontline workers in our banking regulatory system would diversify the voices that get heard. chairman powell, will the fed commit to adding bank workers to your various advisory councils? why or why not? chair powell: very interesting question. we do have quite a diverse group of people on our various
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advisory councils, including people who are representatives of workers. don't know -- i know that we have ones come outside councils who advise on bank supervision per se, but we do always seek out in all of our reserve bank boards and the advisory councils that we do have representation from labor and from people who live and work and were percent the interests of low and moderate income communities. rep. garcia: thank you. appreciate if you would consider that. madam chair, i yield back. rep. waters: thank you. the gentleman from tennessee is recognized for five minutes. >> thank you, madam chair, and thank you, chair powell, for being here this morning. if you can, we look for historical references when we try to reference a current event. a number of pundits, when they
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look at inflation today, they reference it historically to the late 1970's, the early 1980's. in your respect, is that the proper reference? chair powell: that is the proper historical reference for what we are trying not to replicate. all of us have looked carefully at the history of post-world war ii inflation, business cycles, and that kind of thing. one of the things that is different now is that central banks, including the fed, are very squarely taking response ability for inflation. that was not the case in the 1970's. there was a school of thought that there were certain things that an independent agency could not do because it was too hard and congress should do it. so now i think central banks
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around the world have an inflation target, they have transparency so they can be held to account for it. we are not waiting. we are using our tools now. that is really different than it was in the 1970's. also, inflation expectations have been anchored for a long time. they really were into then. they were allowed to become unanchored without much of a response. that would not happen and will not happen. rep. kustoff: when the cpi number came out, i was on my way to a breakfast meeting in jackson, tennessee, where my constituents and i were talking about the new cpi number. he said, i don't care what the number is because i know i am paying 50% more in gas than i did 12 and 18 months ago. i know i am paying 20% to 25% more in grocery prices than a did a year ago. if you were me come if you were
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a member of congress, what would you tell your constituents about the rising cost to just live today? chair powell: inflation is too high. we understand that. we are working on it. we will get it under control. we are seeing this everywhere in the world, more in the united states because our economy is stronger everywhere in the world. rep. kustoff: let me follow up. guy: you have been listening to jay powell's testimony but financial market action is worth pink attention to. we have big moves in a number of markets. european equities as we approach that close up by around 8/10 of 1%. the action a bit like yesterday but almost a mirror image of yesterday in the bond market and commodity market, so the u.k.
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two year is up 26 basis points, yesterday down aggressively. today, we

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