(July 10): US Federal Reserve chair Jerome Powell told lawmakers that policymakers have more work to do on trimming their balance sheet.

“We’ve made quite a lot of progress. We think we have a good ways to go,” the Fed chief said on Wednesday, his second day of Congressional testimony in Washington.

The US central bank has reduced its holdings by about US$1.7 trillion (RM8 trillion) so far and officials expect to shrink the balance sheet substantially more, continuing to offload holdings that ballooned as the Fed snapped up Treasury securities and mortgage-backed securities to stabilise markets and support the economy during the pandemic.

The Fed in June slowed the pace at which it is letting bonds run off its balance sheet, a move Powell said will allow officials to move more carefully as they work to prevent their bond holdings from falling too low. Policymakers want to avoid a repeat of 2019 when a shortage of reserves led to a spike in short-term borrowing costs.

“Going a little bit slower might actually enable us to go further,” Powell said in testimony before the House Financial Services Committee.

More data

Powell reiterated on Wednesday recent price readings have shown “modest further progress,” and “more good data” would strengthen the central bank’s confidence that inflation was returning to its 2% target.

The Fed chair has avoided giving any strong signals on interest rates, though he has emphasized policymakers face risks from both moving too quickly or too slowly to take action.

Powell’s remarks to Congress suggest the Federal Open Market Committee is unlikely to reduce rates when it meets on July 30-31. The Fed has held its policy rate in a range of 5.25% to 5.5%, a more than two-decade high, for nearly a year.

Powell also reiterated comments he made to the Senate Banking Committee on Tuesday that US regulators are close to agreeing to change their plan to force big banks to hold significantly more capital — a move that could mark a major win for Wall Street banks.

September clues

Markets are focused on whether officials will provide more clues after the July gathering about a possible rate cut in September.

While the labour market has held up under pressure from higher interest rates, an uptick in the unemployment rate has added political pressure on Fed officials to start reducing borrowing costs.

The Fed’s preferred inflation measure rose 2.6% in the 12 months through May, down from 7.1% in June 2022. While unemployment remains low at 4.1%, it has ticked up in each of the last three months.

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