Fed's Powell, in Hill appearance, to update views on status of 'disinflation'

Powell's last monetary policy report to Congress was in June.

WASHINGTON, (Reuters) - At his last press conference U.S. Federal Reserve Chair Jerome Powell said confidently a "disinflationary process" had begun, showing a "gratifying" corner had been turned even as he pledged the central bank's fight against rising prices was not over.

But inflation data since his Feb. 1 remarks has moved in the other direction - an inflation "surprise" index from Citigroup rose in February for the first time in months - and when Powell testifies before the Senate Banking Committee on Tuesday the focus will be on whether he remains as confident as he was then that the Fed is on the right path to keep inflation steadily falling towards its 2% target.

Policymakers who have spoken since the most recent inflation data have opened the door to pushing interest rates even higher in response, with investors and economists raising their own expectations for how high the Fed may ultimately increase the target interest rate.

Powell's testimony and answers to lawmakers' questions will be his first public chance to say if he regards recent data as a "blip," as one of his colleagues suggested, or as evidence the Fed is slipping behind the inflation curve and likely to lean on the economy even harder than currently expected.

The hearing, one of the Fed chair's twice-yearly appearances before Congress, begins at 10 a.m. EST (1500 GMT), and will be followed on Wednesday with a session before the House Financial Services Committee.

While ostensibly focused on monetary policy, the questions tend to range across issues, and the sessions this week - the first since Republicans took control of the House after midterm elections - may be particularly wide in scope.

Powell's last monetary policy report to Congress was in June, early in what became the most aggressive cycle of Fed rate increases since the 1980s. That has driven up borrowing costs for home mortgages, a topic of particular sensitivity for elected officials, contributed to volatility in traditional equity markets as well as alternative assets like crypto, and sparked some broader debates about the Fed's efficacy.

Some analysts, for example, have focused on the billions of dollars in losses that the Fed's operations now generate as it pays higher rates for the deposits large banks hold in their central bank reserve accounts than it earns on its own holdings of U.S. government bonds and mortgage backed securities.

Others have focused on the Fed's repeated statements that unemployment needs to rise for inflation to fall - a conclusion that may come under particular fire from Senate and House democrats.

Fed rate hikes "are designed to harm the labor market. We are not seeing inflation because of greedy workers ... What we have seen is a host of factors" driving inflation, from expanded profit margins to the Ukraine war, that are not particularly influenced by interest rates, Rakeen Mabud, chief economist for the labor oriented Groundwork Collaborative think tank, said on the eve of hearings.

Inflation has fallen since Powell's last Congressional appearance. After topping out at 9.1% annual rate in June, consumer price inflation dropped to 6.4% in January; the separate Personal Consumption Expenditures price index, which the Fed uses as the basis for its 2% target, peaked at 7% in June and had fallen to 5.4% as of January.

But, as Powell will almost certainly restate, progress has been stodgy, and in the case of January's data the CPI declined less than expected, revised statistics for prior months showed less progress than Powell had in hand at his press conference, and PCE inflation actually rose.

Surprisingly for the Fed, and also a likely focus of the hearings, is the fact that so far the U.S. has absorbed the central bank's rate increases without any serious loss of economic momentum or evidence that companies are on the verge of mass layoffs.

In fact economic and job growth has continued faster than expected, with January producing another shock for Powell in the form of more than half a million additional payroll jobs and a 3.4% unemployment unseen since the 1960s. Despite some high-profile layoff announcements, weekly new jobless claims have remained below 200,000 for seven consecutive weeks, comparable to pre-pandemic levels.

That ongoing strength has posed perhaps the key question for Powell to answer: Whether the impact of monetary policy is just delayed and on the way, or whether the current economy needs even tighter monetary policy, with all the risks that entails.