Powell's Congressional Test "Speech" is Here: The Federal Reserve will "cautiously" assess the outlook, be wary of high valuations in financial markets, and avoid discussing Trump

On February 7th, Friday, Eastern Time, the Federal Reserve released the "speech" of Chairman Jerome Powell for next week's congressional hearing— the Federal Reserve's semi-annual monetary policy report. Next week, members of both the House and Senate will question Powell after he reads the relevant content of this report. In this report submitted by the Federal Reserve to congressional lawmakers, the Fed expresses an optimistic view on the economic situation in the United States, stating that inflation has eased slightly last year after a significant slowdown in 2023, but remains somewhat above the Fed's target of 2%. Inflation expectations seem to be "generally aligned" with this target; the labor market has stabilized after a period of loosening, and the unemployment rate remained low and stable in the second half of last year; thanks to strong consumer spending growth, GDP grew steadily last year. In summary, the report indicates that the overall U.S. economy is robust, the labor market is more balanced, and inflationary pressures have eased. Based on the continued loosening of the tight labor market and further easing of inflation, the Federal Reserve has cut interest rates since September last year, totaling a 100 basis point reduction over three meetings. The Fed also continues to reduce its balance sheet (quantitative tightening) by decreasing its bond holdings. In the report, the Federal Reserve reiterates its firm commitment to supporting maximum employment and bringing inflation back down to 2%, while still focusing on the two-sided risks to achieving these goals. When considering the extent and timing of future interest rate adjustments, the Fed will "carefully assess future data, changes in the outlook, and the balance of risks." The report believes the U.S. economy is robust but also mentions some financial risks, with little reference to the impact of the Trump administration's policies. Stock Market, Corporate Bonds, and Residential Property Valuations Remain High; Valuation Pressure at This Level Has Increased In evaluating financial stability, the report first states that the financial system remains healthy and resilient, but then points out: "In a range of markets, valuations remain relatively high compared to fundamentals, including the stock market, corporate bonds, and the residential real estate market." Subsequently, the report also comments: "The already high valuation pressure has increased." The report mentions that due to the influence of large corporations' stock prices, the 12-month forward price-to-earnings ratio of the stock market is close to the high end of its historical range; compared to historical levels, the spread between corporate bonds and comparable U.S. Treasury bonds is very low; and the price-to-rent ratio in the residential real estate market is near record highs. The report concludes: "Vulnerabilities related to financial leverage remain evident." The report states that the banking sector overall remains robust and resilient, with most banks' capital levels continuing to be well above regulatory requirements, although some banks have significant fair value losses on fixed-rate assets and remain sensitive to changes in long-term interest rates. The overall credit quality of bank assets is good, with delinquency rates on bank loans generally remaining at historical lows, while some banks, insurance companies, and securitized instruments continue to concentrate investments in commercial real estate. Only Two Mentions of Tariffs; Taxation Outlook Drives Recent Dollar Appreciation Wall Street Insights notes that this report rarely mentions the impact of the Trump administration since it took office this year. In the 83-page report, even the term "tariffs," which indirectly refers to the policies of the Trump administration, appears only twice Once when discussing the significant rise of the US dollar index since mid-2024, the report stated that market participants attributed the recent increase in the dollar index to the widening interest rate differentials between the US and other developed economies, the relative strength of the US economy, and changes in the political and fiscal situations of some foreign economies. "Some market participants also pointed out that the potential imposition of tariffs on imported goods by the US may be a factor driving the dollar's rise in recent months." Another time, when discussing the external financial environment of the US, the report noted that in September last year, inflows into emerging market economy (EME) funds reached a monthly record high, but in the fourth quarter, there was a significant outflow of funds, reflecting investors' reactions to the prospect of new tariffs on imported EME goods by the US