Jerome Powell says the Fed is still 'very far' on inflation

Happy Friday eve, readers. I'm Phil Rosen, reporting from New York.

A lot's been happening on Capitol Hill this week.

Fed Chairman Jerome Powell testified before the House, central bank nominees are talking to the Senate, and the Washington Wizards traded away their star hooper.

I'll leave it to you to read up on that last one, but below are the takeaways from Wednesday's Fed comments and how markets have responded.

1. Powell spoke before the House Financial Services Committee yesterday following 10 consecutive interest rate hikes and one rate "skip" that the Fed chief made sure to clarify wasn't a "pause."

He told lawmakers that the central bank remains "very far" from its 2% inflation target and is likely to raise interest rates further in the coming months, adding that the June respite was to give his colleagues more time to assess economic data.

"Given how far we've come, it may make sense to move rates higher but to do so at a more moderate pace," Powell said Wednesday.

To be sure, consumer inflation has slowed substantially from last year's peak of around 9%.

But the latest CPI reading of 4% is still too hot for the Fed, and the central bank's preferred inflation gauge is even higher at 4.7%.

Remember, the balance here is to raise borrowing costs to slow the economy down enough to cool inflation, but not so much that growth turns negative and a recession hits.

So far, the economy has been more resilient than expected, even as the fed funds rate hovers in the 5% to 5.25% range.

Spending and inflation haven't quite eased as much as anticipated, and that's left some Fed officials penciling in a few more hikes for 2023, projections show.

Patrick McHenry, chairman of the Financial Services Committee, questioned whether a rate "skip" was contradictory to forecasts for higher rates.

Powell effectively said no, but in Fed-speak:

"Those two things are entirely consistent. The level to which we raise rates is a separate question from the speed of which we move."

Powell noted that his team would make decisions "meeting by meeting," and stick to data-dependent moves.

"We have been seeing the effects of our policy tightening on demand in the most interest-rate-sensitive sectors of the economy," he said. "It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation."

All indications suggest the stock market doesn't like the sound of more rate hikes. Stocks have entered a mini-slump since last week, after massive rallies for a handful of names.

The S&P 500 is on a three-day losing streak, and recent winners like Tesla, Nvidia, and Apple all slid Wednesday.

Goldman Sachs strategists wrote in a note this week that there's still a good chance of upside ahead for the key index, but advised investors to consider hedging for a potential recession.

The firm gives about a one-in-four shot of an economic downturn, and that could drag the S&P 500 down as much as 23%, in their view.

What's your reaction to Powell forecasting more interest rate hikes? Tweet me (@philrosenn) or email me (prosen@insider.com) to let me know.

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2. US stock futures fall early Thursday, after Federal Reserve Chair Jerome Powell said more rate hikes are likely ahead. Check out the latest market moves.

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Curated by Phil Rosen in New York. Feedback or tips? Tweet @philrosenn or email prosen@insider.com.

Edited by Jason Ma in Los Angeles and Hallam Bullock (@hallam_bullock) and Nathan Rennolds (@ncrennolds) in London.