Powell hearing: Put on hawkish vest again and emphasize that private stablecoins cannot become digital dollars

On Thursday local time, Federal Reserve Chairman Powell went to the House of Representatives to provide testimony to the Financial Services Committee. Similar to yesterday, the Federal Reserve Chairman's series of speeches still focused on the risks that the U.S. economy may face next.

First of all, the most noteworthy thing is that after yesterday's hearing, many media reported that Powell did not use the word "unconditional" in his promise to control inflation, which may indicate that the Fed is not as hawkish as the outside world worries. Powell, who has always kept a close eye on media trends, quickly made up for it on Thursday, emphasizing in a resounding voice that "the Fed is unconditionally committed to fighting inflation."

Risk point +1: It is basically certain that the unemployment rate will rise

Compared with yesterday's wording such as "there are challenges in achieving a soft landing for the economy", Powell's approach to describing risks on Thursday was more down-to-earth.

The Fed chairman said that the current rate hike is to drive economic growth down to a more sustainable pace and give the supply side a chance to catch up. However, the Fed does not have "precise tools" at hand, so it is very likely that the unemployment rate will rise from its historical low. However, the Fed's interest rate hike is not aimed at creating unemployment, and the labor market with an unemployment rate of 4.1% or 4.3% is still strong.

According to the latest non-farm data, the U.S. unemployment rate of 3.6% in May has reached the pre-epidemic level, completely wiping out the situation in 2020 when the unemployment rate once reached 14.7%. Currently, Federal Reserve officials expect the unemployment rate to reach 3.9% and 4.1% by the end of 2023 and 2024.

(U.S. unemployment rate, source: tradingeconomics)

Powell emphasized on Thursday that the 4% unemployment rate is still a very strong number. As of today, there are two vacancies for every unemployed American, which is a reflection of the overheated labor market. So there is still a possibility that the job market will not be hit.

For the U.S. macro-economy, unemployment data will also be placed in a more important position. On Wednesday, Philadelphia Fed President Patrick Harker mentioned that the symbol of a hard landing for the U.S. economy should be an unemployment rate "significantly" higher than 4% . As the first Fed official to publicly talk about recession indicators, this statement itself also means that the Fed has begun to think about the actual recession.

Interestingly, a member of Congress also gave Powell a test on Thursday: The unemployment rate is rising, but inflation has not come down. What will you do?

Chairman Powell responded: The most important thing is that the Federal Reserve cannot fail in controlling inflation. It needs to see solid evidence before announcing that it has successfully controlled inflation, so it may be hesitant about cutting interest rates.

As for the argument of former Treasury Secretary Summers, a popular television commentator, that controlling inflation requires the U.S. unemployment rate to be above 5% for five years, or above 10% for a year, Powell refuted it, saying that we would not see such a thing if supply-side problems were resolved, but added that this is a "highly uncertain period."

Including Federal Reserve Board Governor Bowman's statement on Thursday, several Federal Reserve officials have supported a 75 basis point rate hike in July in the past week, while maintaining the stance of raising interest rates by at least 50 basis points each time thereafter until inflation actually weakens.

Let’s talk about the digital dollar again: it must be issued by the government

At Thursday's hearing, Powell was also asked about the Fed's progress in studying digital stablecoin policies. In response, he said that central bank digital stablecoins are a very important financial innovation that will affect all Americans. The Fed plans to advance policy and technology research in the next few years and make recommendations to Congress at some point in time.

Powell also emphasized on Thursday that if the United States wants to launch a digital stablecoin, it must be the U.S. government, not private enterprises, that provides endorsement.

The Fed Chairman said: “One question about central bank digital stablecoins is, do we want private stablecoins to ultimately become digital dollars? I think the answer is no.”