Federal Reserve Chairman Powell stated that the latest consumer price data shows that although the Fed has made substantial progress in curbing inflation, further efforts are still needed.

Powell testified before the House Financial Services Committee on Wednesday, saying, "I would say we are close to our target on inflation, but we haven't fully met it yet." This is his second day of semi annual testimony to Congress.

He added, 'Last year's inflation rate was 2.6% - significant progress has been made - but we haven't fully reached our target yet. Therefore, we hope to maintain policy tightening for now,' implying that interest rates will remain high for the foreseeable future.

Do not overly interpret CPI data

The latest inflation data released on Wednesday showed that consumer price growth exceeded expectations at the beginning of the year. The so-called core consumer price index, which excludes food and energy costs, rose by 0.4% in January, the largest increase since March.

The report details that the costs of housing, prescription drugs, car insurance, and groceries have increased, with a significant rise in egg prices being the main driving factor. These increases have continued the trend of price increases for many years, highlighting the continuing plight of millions of Americans in their efforts to pay higher living costs with limited wages.

Since September, the Federal Reserve has reduced borrowing costs by 1 percentage point, and policymakers have stated that it is now time to pause further interest rate cuts to assess the economic situation and wait for further inflation to decline.

Regarding the CPI data, Powell warned on Wednesday not to overinterpret the data showing the largest month on month increase in the Consumer Price Index (CPI) in over a year, while also acknowledging that the reading was significantly higher than expected.

Powell said at the hearing of the House Financial Services Committee that the CPI reading is almost higher than all predictions, but I just want to remind you of two points. Firstly, we will not get excited about one or two good readings, nor will we get excited about one or two bad readings. Secondly, our inflation target focuses on the Personal Consumption Expenditures (PCE) price index, as we believe it is a better indicator for measuring inflation.

Therefore, you need to know the conversion from CPI to PCE, and tomorrow we will obtain more relevant data from the Producer Price Index (PPI). We will know the PCE reading later tomorrow.

Powell stated in his prepared speech, "We don't need to rush to adjust our policy stance." He also reiterated this viewpoint in his comments to the Senate panel on Tuesday.

Anna Wong and Stuart Paul from Bloomberg Economic Research wrote that although this report disturbed the market and lowered the possibility of the Federal Reserve cutting interest rates in the first half of this year, the rise was "mainly due to residual seasonal factors, namely the 'January effect', which limited the signals released by the hot data." At the same time, inflation slightly cooled down at the end of 2024. Given that companies readjust prices at the beginning of the year, if the seasonal adjustment process does not fully reflect the typical accelerated growth at the beginning of the year, the seasonally adjusted data will be higher than normal levels

After the inflation data was released, the US stock market fell at the opening, while the yield of treasury bond bonds and the US dollar rose sharply. According to interest rate swaps, traders now expect only one rate cut this year, with each cut being 25 basis points. Before the release of the Consumer Price Index (CPI) report, traders tend to anticipate two interest rate cuts.

Trump's policies

Earlier on Wednesday, President Trump posted on Truth Social calling for a reduction in interest rates, stating that it would be "complementary to the upcoming tariff policy.

When asked about Trump's post, Powell refused to comment. He added that the American people can trust that the Federal Reserve will continue to make decisions according to the changes in the economic situation.

Powell stated that the role of the Federal Reserve is not to comment on the rationality of policies implemented by Congress or the government, but he also pointed out that new policies may prompt the Federal Reserve to adjust interest rates. He mentioned potential changes in tariffs, immigration, fiscal policy, and regulation.

He said, "The underlying economy is very strong, but there is some uncertainty about the new policies. We can only wait and observe the impact of these policies before considering what measures we can take

Banking supervision

Powell also stated that before the establishment of the position of Vice Chairman of Banking Supervision in Congress, the volatility of banking regulatory policies was relatively low, implying that the Federal Reserve could work more effectively without this position.

Powell said, "Concentrating all regulatory powers in one person, even if only making recommendations to the board, may also lead to fluctuations in these policies

Michael Barr, the Vice Chairman of Banking Supervision (appointed during the Biden era), stated that if his successor is confirmed, he will resign from the position of Chief Banking Supervision Officer of the Federal Reserve on February 28th or earlier. Barr plans to continue serving as a member of the Federal Reserve Board of Governors.

Policy framework evaluation

Powell stated that he believes officials will make appropriate and specific adjustments to long-term policy strategies, and expects to complete the latest assessment by the end of this summer.

When asked if the 2020 policy framework limited the Fed's policy response to inflation, Powell said, "No