Thread by @RickRieder

In testimony before #Congress yesterday, @federalreserve #ChairPowell unsurprisingly displayed resolve that the central bank’s fight to return inflation closer to its 2% target is unfinished and that the historical record suggests that relenting too soon would be a mistake.

Chair #Powell signaled more rate hikes and a higher terminal rate than previous #Fed projections, and an openness to adjust the pace of rate hikes depending on the totality of the data.

With the strength recently witnessed in the #LaborMarket data, in various #inflation measures and in #economic growth readings more generally, this resolve by policymakers would seem to be not only required, but critical to returning inflation to more normal levels.

However, he did not prejudge policy decisions, and the #FOMC still has to see two more big data releases (the Feb #Employment Report, out this Friday and the Feb #CPI, out Mar 14) before having to make decisions on policy rates and economic projections at its Mar 21-22 meeting.

The recent #inflation data has regained some surprisingly strong momentum. In fact, some key areas of inflation that had led inflation lower in recent months were stubbornly strong in January.

The meaningful decline in #UsedCar prices may well be in the process of being reversed, as the #Manheim used vehicle value index (which tends to lead used car CPI) has recently turned higher.

So, while we’re quite confident that last year’s elevated #inflation peak won’t be exceeded, the possibility of inflation remaining stickier for longer does suggest that the #Fed will have to keep hiking rates for longer than previously thought.

In the end, with the #payroll strength we’ve witnessed and the stickiness of #inflation, we think there’s a reasonable chance that the #Fed will bring the Fed Funds rate to 6%, and then keep it there for an extended period to slow the economy and get inflation down to near 2%.

This is partly due to the fact that today’s #economy is no longer as #interest-rate sensitive as that of past decades, and its resilience, while a virtue, does complicate matters for the #Fed.