Powell Hearing: Expect a modest 25bps rate hike in March; cryptocurrencies a 'speculative tool'

On the morning of March 2, Eastern Time, Federal Reserve Chairman Jerome Powell attended the House Financial Services Committee of the House of Representatives to testify for the Fed's semi-annual monetary policy report and be questioned by lawmakers. At the meeting, Powell said that the Russian-Ukrainian war has injected uncertainty into the U.S. economic outlook, but he reiterated that raising interest rates is still appropriate, supporting a 25 basis point increase in interest rates in March.

Rate hike expectations

Powell said: "The impact on the U.S. economy is highly uncertain and we will be monitoring the situation closely... The near-term impact of ongoing wars, sanctions and upcoming events on the U.S. economy remains highly uncertain, and in this environment, formulating appropriate measures Monetary policy needs to recognize that the economy moves in unexpected ways. We need to be flexible to future data and changing prospects.”

U.S. inflation has reached its highest level in 40 years, and the Russia-Ukraine war has pushed oil prices to their highest levels in a decade. U.S. consumer prices rose 7.5% in January from a year earlier, Bitt said, with the Fed's preferred measure of core inflation hitting its strongest annual gain since 1983.

Powell said at the meeting that he would be open to more aggressive moves if inflation worsens, that the Fed is ready to raise interest rates more at one or more future meetings.

Market expectations for rate hikes for the rest of the year have declined since the start of the Russian-Ukrainian war, according to CME Group FedWatch data. Traders are now pricing in five 25-basis-point hikes that would lift the benchmark federal funds rate to 1.25%-1.5% from its current 0%-0.25% range.

Crypto Regulation

On the subject of cryptocurrencies, Powell called existing digital currencies "speculative vehicles." "Existing digital currencies ... are really speculative tools. They're not for payments, they're not stores of value, they're speculative tools (as gold does). That's what they're for," he said.

Powell made it clear that the development of cryptocurrencies should not hinder the ability of law enforcement to track payments, especially as the outbreak of the Russian-Ukrainian war highlighted the need for crypto regulation.

“[The Ukrainian-Russian conflict] underscores the need for Congress to act on digital finance, including cryptocurrencies, and we have a booming industry with many parts, but without the necessary regulatory framework in place,” he said.

Powell also mentioned that another example of crypto sorely needed regulation is the potential for terrorists or other malicious actors to abuse cryptocurrencies for wrongdoing, comparing the crypto industry to the early days of railroads and telephones, adding that a framework is needed to Preventing unbacked cryptocurrencies from serving as “tools for general crimes like terrorist financing and tax avoidance,” he noted: “Cryptocurrencies are a means of evading law enforcement, and that’s not something we should tolerate.”

Last July, Powell told Congress that stablecoins (crypto tokens pegged to fiat currencies such as the U.S. dollar) should be regulated in a "similar manner" to bank deposits and money market mutual funds. Bitui previously reported that in January this year, Powell said the Federal Reserve would soon issue a report on central bank digital currencies and cryptocurrencies.

CBDCs and Stablecoins

Powell also spoke about the Fed’s plans around central bank digital currencies (CBDCs). He noted that CBDCs are unlikely to eliminate the use of private cryptocurrencies.

Despite backlash from other lawmakers, plans to roll out a CBDC in the U.S. have been slow. Congressman Juan Vargas (D-Calif.) asked about the Fed’s recent report on CBDCs at the meeting. Powell said the Fed is seeking public input and it is an open question whether the benefits of a CBDC outweigh the costs. "It's going to be something that we're going to put a lot of time and expertise into...getting it right. We haven't decided if we're going to roll it out," he said.

Powell also mentioned stablecoins, saying: “I think there may be a role for well-regulated stablecoins, which I haven’t seen yet, but have the potential to become efficient and popular with consumers over time. "

Powell acknowledged that the U.S. does benefit from the U.S. dollar’s status as the global reserve currency, and because of the rule of law framework, the U.S. dollar is the best currency, and it is difficult to reproduce an economic system similar to the U.S. in the short term. However, Powell also said that it is possible for more than one major reserve currency to emerge in the world, but it will take time.