By Ambar Warrick

Investing.com– Consumer price index inflation in Japan’s capital fell slightly less than expected in March, data showed on Friday, as the impact of government subsidies on utility prices was largely offset by sharp increases in the prices of most other goods.

Tokyo Core CPI rose 3.2% in the 12 months to March, data from the Statistics Bureau showed, more than expectations for growth for 3.1%, but below the prior month’s reading of 3.3%. The core reading excludes volatile items such as fresh food.

Including all items, overall Tokyo CPI rose 3.3% in March, down slightly from the 3.4% seen in the prior month. 

The reading, which usually heralds a similar trend in nationwide inflation data released later, indicates that while government subsidies on utilities helped ease some cost pressures, high food and household goods prices kept inflation elevated in Tokyo through March.

Still, March’s reading marks a second straight month that Tokyo inflation has retreated after hitting an over 40-year high of 4.3% in January. The Tokyo Core CPI was also at its lowest level since October. 

The drop in inflation was largely driven by government subsidies on electricity prices, which sank 6% in March. The Japanese government had earlier this year rolled out an additional 2 trillion yen ($1=133.01 yen) to offer subsidies on some utilities and help rein in high inflation.

But this was largely offset by steadily increasing prices for most other goods. Food prices rose 7.6%, while gas prices jumped over 12% in the month.

Friday’s reading, while stronger than expected, still comes in line with a Bank of Japan forecast that inflation will ease in the first half of 2023. This is expected to keep the central bank’s ultra-loose monetary policy unchanged, for the time being.

But inflation is expected to pick up again by late-2023, which could see the BOJ once again consider tightening policy.

The yen sank 0.3% to 133.08 after the reading, given that it still showed some easing in inflation.

Data last week showed that nationwide Japanese inflation eased further from 40-year highs in February. But March’s Tokyo CPI reading indicates that inflation may now be retreating at a slower than expected pace. 

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever.

An interest rate decision in Thailand and Australian inflation top a light Asian calendar on Wednesday, with broader risk appetite likely to be tempered by a further rebound in U.S. bond yields.

The two-year Treasury yield rose only a few basis points, but the fact that it increased at all following the previous day’s 21 bps surge is notable, and rate-sensitive tech stocks dragged Wall Street into the red.

It is very early days, but there is a growing sense of optimism that the banking shock is abating. Michael Barr, the Fed’s vice chairman for supervision, and FDIC Chairman Martin Gruenberg told lawmakers on Wednesday that depositor funds in U.S. banks are safe and sound.

But this relief is running up what looks like a renewed spike higher in bond yields and borrowing costs, which is dampening risk appetite.

One curiosity is the dollar, weakening again on Tuesday despite the rise in U.S. bond yields. Indeed it mostly struggled to catch a safe-haven bid when the banking stresses were most acute and is now struggling even when U.S. yields are rising.

Dollar index, https://fingfx.thomsonreuters.com/gfx/mkt/zgpobaejnvd/USDINDEX.png

Asia’s equity spotlight on Wednesday will shine on China’s Alibaba Group after the conglomerate founded by Jack Ma said on Tuesday it plans to split its business into six main units covering e-commerce, media and the cloud.

The news – a surprising and major revamp as China looks to ease regulatory crackdowns and support private enterprises – sent U.S.-listed shares up 14% on Tuesday, recovering some of the nearly 70% lost since curbs were imposed in late 2020.

On the Asian policy front on Wednesday, the Bank of Thailand is set to implement its fifth consecutive quarter-point rate hike in an attempt to get inflation back within target.

Eighteen of 22 economists polled by Reuters expect the BOT to raise its benchmark one-day repurchase rate to 1.75%.

Inflation has fallen to a 13-month low of 3.79%, but that is still above the BOT’s target range of 1% to 3% and policymakers have signaled that the tightening cycle is not yet over.

Australian inflation figures for February and a raft of data from Vietnam – Q1 GDP and March inflation, trade and industrial production – will also be released.

By Wayne Cole

SYDNEY, (Reuters) – Asian shares followed U.S. stock futures higher on Monday on hopes authorities were working to ring fence stress in the global banking system, even as the cost of insuring against default neared dangerous levels.

Helping nerves were reports First Citizens BancShares Inc was in advanced talks to acquire Silicon Valley Bank from the Federal Deposit Insurance Corp.

S&P 500 futures firmed 0.5% in early trade while Nasdaq futures added 0.4%.

MSCI’s broadest index of Asia-Pacific shares outside Japan edged up 0.1%, with trading cautious. Japan’s Nikkei gained 0.1% and South Korea 0.2%.

The mood remained jittery after shares in Deutsche Bank fell 8.5% on Friday and the cost of insuring its bonds against the risk of default jumped sharply, along with the credit default swaps (CDS) of many other banks.

“The current level of credit default swaps for European banks is just a little lower than it was during the height of the European financial crisis in 2013,” noted Naeem Aslam Chief Investment Officer at Zaye Capital Markets.

“If these CDS do not normalise, it is highly likely stock market may continue to suffer for many days.”

Over in the United States, depositors have been fleeing smaller banks for their larger cousins or to money market funds. Flows to money market funds have risen by more than $300 billion in the past month to a record atop $5.1 trillion.

Minneapolis Fed President Neel Kashkari on Sunday said officials were watching “very, very closely” to see if the banking stress led to a credit crunch that threatened to tip the economy into recession.

That, in turn, meant the Fed was closer to a peak in rates, he added. Markets are well ahead of the central bank in pricing around an 80% chance rates have already peaked, while a first rate cut is seen as early as July.

Fed Governor Philip Jefferson speaks later on Monday, while Fed Vice Chair for Supervision Michael Barr testifies on “Bank Oversight” before the Senate on Tuesday.

Yields on two-year Treasuries have fallen an astonishing 102 basis points so far this month to stand at 3.77%, while the entire yields curve out to 30 years is below the 4.85% effective funds rate.

That dive has sometimes been a drag on the dollar, at least against the safe-haven Japanese yen where it stands at 130.85 yen, having touched a seven-week low of 129.65 last week.

The euro suffered its own reversal on Friday amid the worries over Deutsche, and it was last at $1.0767 and well off last week’s $1.0930 top.

The drop in yields has combined with the run from risk to burnish gold, which was trading at $1,975 an ounce after reaching a high above $2,009 last week. [GOL/]

Oil prices were steadier early Monday, but are still nursing losses of almost 10% for the month as worries about global growth undermine commodities in general. [O/R]

Brent added 43 cents to $75.42 a barrel, while U.S. crude rose 47 cents to $69.73 per barrel.

(Reporting by Wayne Cole; Editing by Sam Holmes)

By Nupur Anand, Lananh Nguyen and Andrea Shalal

(Reuters) – A scramble by troubled U.S. lender First Republic Bank (NYSE:FRC) to secure a capital infusion kept worries about the broader banking sector alive on Wednesday as authorities considered steps to further strengthen financial stability.

While recent market turmoil has eased, the Federal Reserve’s meeting later in the day is now a major focus for investors, with traders split over whether the U.S. central bank will be forced to pause its hiking cycle to ensure financial stability.

The Fed’s relentless rate hikes to rein in inflation have been partly blamed for sparking the biggest meltdown in the banking sector since the 2008 financial crisis.

The collapse of Silicon Valley Bank, which sank under the weight of bond-related losses due to surging interest rates, kicked off a tumultuous 10 days for banks which culminated, for now, in the 3 billion Swiss franc ($3.2 billion) Swiss regulator-engineered takeover of Credit Suisse by rival UBS on Sunday.

(GRAPHIC: Traders bet on rate hike as fears of bank crisis ease Traders bet on rate hike as fears of bank crisis ease- https://www.reuters.com/graphics/USA-RATES/FEDWATCH/xmpjkbnxmvr/chart.png)

The wipeout of Credit Suisse’s Additional Tier-1 (AT1) bondholders has sent shockwaves through bank debt markets, and some Asian lenders may find it difficult to replenish their capital by issuing AT1 bonds, Citigroup (NYSE:C) said in a research note on Wednesday.

And worries over the health of mid-sized U.S. lenders linger, particularly First Republic.

For now, Credit Suisse’s rescue appears to have assuaged the worst fears of systemic contagion, boosting shares of European banks and U.S. regional lenders.

The S&P 500 banks index rallied 3.6%, its largest one-day gain since November.

However, First Republic’s efforts to secure a capital infusion continued without success on Tuesday, as the troubled regional lender started to plan for the possibility it may need to downsize or get a government backstop.

That sent shares of First Republic tumbling 9% in extended trade on Tuesday evening, having surged as much as 60% and closing regular trade up 30%. First Republic has shed 80% of its market value this month.

The San Francisco-based bank is looking at ways it can downsize if its attempts to raise new capital fail, three people familiar with the matter told Reuters. JPMorgan Chase (NYSE:JPM) has been helping the bank find new sources of capital after a $30 billion injection of deposits from big banks failed to stem fears over its viability.

The scenarios were being discussed as major bank chief executives gathered in Washington for a scheduled two-day meeting starting Tuesday, sources familiar with the matter said.

Among options was the possibility the government could play a role in lifting assets out of First Republic that have eroded its balance sheet, Bloomberg News reported on Tuesday, citing people with knowledge of the situation.

‘FEEL SECURE’

Policymakers from Washington to Tokyo have stressed the current turmoil is different from the crisis 15 years ago, saying banks are better capitalised and funds more easily available.

Still, Australia’s prudential regulator has started asking the country’s banks to declare their exposure to startups and crypto-focused ventures following the collapse of Silicon Valley Bank, according to the Australian Financial Review.

U.S. Treasury Secretary Janet Yellen said the country’s banking system was sound despite recent pressure.

(GRAPHIC: Over $95 billion in market value wiped out in 2 weeks- https://www.reuters.com/graphics/GLOBAL-BANKS/USA/myvmobkeovr/graphic.jpg)

Deputy Treasury Secretary Wally Adeyemo said a review of the failures of Silicon Valley Bank and rival Signature Bank (NASDAQ:SBNY) was in order.

“It’s … important that we review the failures of the two banks in question to ensure we have a set of rules and procedures for the banking system that continues to protect our economy and depositors across the country,” Adeyemo said on Tuesday at an event hosted by the U.S. Hispanic Chamber of Commerce.

“We of course continue to monitor the current situation and consider what steps can be taken to further strengthen America’s financial stability,” he said, without elaborating.

Political pressure continued to grow in the United States to hold bank executives accountable. The Senate Banking Committee’s chairman said the panel will hold the “first of several hearings” on the collapse of SVB and Signature Bank on March 28.

(GRAPHIC-Credit Suisse rescue: https://www.reuters.com/graphics/GLOBAL-BANKS/myvmobgwyvr/chart.png)

($1 = 0.9280 Swiss franc)

By Oliver Gray 

Investing.com – U.S. stock futures were trading higher during Sunday’s evening deals as investors monitored increased pressure on the financial sector following reports that embattled bank Credit Suisse (SIX:CSGN) has been bought out by UBS Group AG (SIX:UBSG) for $3 billion Swiss francs (US$4.8 billion) in a government-backed deal.

By 6:35pm ET (10:35pm GMT) Dow Jones Futures were up 0.2% while S&P 500 Futures and Nasdaq 100 Futures gained 0.2% apiece.

Ahead in the week, market participants will be closely monitoring the Fed’s interest rate decision amid expectations of a 25 basis point hike. Meanwhile, new and existing home sales, building permits, durable goods orders, Manufacturing and services PMIs, as well as a speech from FOMC member Bullard.

During Friday’s trade, the Dow Jones Industrial Average fell 384.6 points or 1.2% to 31,862, the S&P 500 lost 43.6 points or 1.1% to 3,916.7 and the NASDAQ Composite fell 86.8 points or 0.7% to 11,630.5. for the week, the Dow added 0.1%, the S&P 500 added 2.1% and the NASDAQ gained 5.3%.

On the bond markets, United States 10-Year rates were at 3.436%

By Oliver Gray 

Investing.com – U.S. stock futures were trading in a mixed fashion during Wednesday’s evening trade amid growing fears of a widespread banking crisis as Credit Suisse (SIX:CSGN) Group (NYSE:CS) tanked 30% during the regular session after Saudi National Bank ruled out further investment.

By 6:40pm ET (10:40pm GMT) Dow Jones Futures were flat and S&P 500 Futures ticked 0.1% higher and Nasdaq 100 Futures added 0.2%.

In extended deals, Adobe Systems (NASDAQ:ADBE) added 4.6% after reporting Q1 EPS of $3.80 versus $3.68 expected on revenues of $4.66 billion $4.62 billion expected. The company forecasted Q2 2023 EPS in the range of $3.75-$3.80 versus $3.76 expected and revenues of $4.75-4.78 billion versus consensus of $4.76 billion.

LivePerson Inc (NASDAQ:LPSN) dropped 38.7% LOWER, reporting Q4 EPS losses of $0.55 per share versus estimates of $0.12, while revenue came in at $122.5 million versus $126.93 million.

Uipath Inc (NYSE:PATH) added 12.6% after the company reported Q4 EPS of $0.15 versus $0.06 expected on revenues of $308.5 million versus $278.64 million expected.

Ahead in Thursday’s trade, investors will be monitoring preliminary building permits, import and export price index data, housing starts, weekly jobless claims and the Philadelphia fed manufacturing index.

During Wednesday’s regular session, the Dow Jones Industrial Average fell 280.8 points or 0.9% to 31,874.6, the S&P 500 lost 27.4 points or 0.7% to 3,891.9 while the NASDAQ Composite added 5.9 points or 0.1% to 11,434.1.

On the bond markets, United States 10-Year yields were at 3.462%.

(Bloomberg) — Asian equities look set for declines Tuesday while bonds rallied in early trading as the collapse of Silicon Valley Bank continued to reverberate across global markets.

Policy-sensitive two-year government bond yields tumbled around 20 basis points in New Zealand, as did the rate on Australia’s three-year maturity. Shares dropped in these two markets, with financial stocks prominent among the decliners. Futures contracts for benchmark indexes in Japan and Hong Kong were also lower.

In the US on Monday, the yield on the two-year Treasury note plunged in its biggest one-day slump in decades while tech stocks rebounded from last week’s rout. The two-year yield dropped by more than a half-percentage point, logging the biggest three-day retreat since Black Monday of October 1987.

The dollar held most of its losses in early Asian trading after erasing its gains for the year on Monday. The yen, Australian dollar and offshore yuan all appreciated more than 1% against the greenback on Monday.

The market turmoil has caused a swift reassessment over the direction of Fed policy. Swaps traders are now pricing a less than 60% chance the Fed will hike by another quarter percentage-point later this month.

Goldman Sachs Group Inc. economists as well as asset managers at the world’s largest actively managed bond fund from Pacific Investment Management Co. said the Fed could take a breather on the policy rate following the collapse of SVB. Nomura economists took it one step further, saying the Fed could cut its target rate next week.

Expectations had weighed a hike of as much as 50 basis points after Chair Jerome Powell addressed lawmakers last Tuesday. Traders will soon turn their attention back to US consumer price index report, which could drive further bets on the Fed’s next move.

The S&P 500 closed Monday down 0.2%, after bouncing between gains and losses amid a rout in bank shares while the policy-sensitive Nasdaq climbed 0.8%, the most in over a week. The fallout from SVB’s collapse prompted President Joe Biden to promise stronger regulation of US lenders, while reassuring depositors that their money is safe.

The KBW Bank Index logged its biggest one-day drop since the start of the Covid-19 pandemic. Asian investors will also have their focus on the region’s banking stocks, which were under some pressure Monday, particularly in Japan.

Treasury Secretary Janet Yellen said her office would protect “all depositors” at SVB. The government actions will also include a new lending program that Fed officials said would be big enough to protect uninsured deposits in the wider US banking sector. Still, the sudden closing of New York’s Signature Bank by state regulators Sunday underscored the urgency of stabilizing the financial system.

Wall Street’s so-called “fear gauge” spiked, with the Cboe Volatility Index rising above 30 for the first time since October.

Here is how Wall Street is weighing the Fed’s next move:

We forecast a 25bp Fed hike, but Powell talk and high CPI point to close call. The threat to our views comes from Fed Chair Powell. While Powell opened the door to a large March hike, he did not walk through it, noting that the upcoming decision will be determined by “the totality of the data.”

The Fed decision will incorporate two additional factors. First, this week’s CPI report. Second, the Fed will consider the potential for financial stress to build.

— Marko Kolanovic, JPMorgan Chase & Co. strategist

The Fed has to be off the table for now. They pushed on rates until something cracked, well guess what? Something cracked.

To see QT stop would not be surprising, and maybe something to support the market. I think we’re back in crisis mode, and remember, to me, bank runs are way way way more important than inflation, so that’s what they’ve got to be arresting.

— Peter Tchir, head of macro strategy at Academy Securities

Pressure on banks dampens the rate outlook some, but decisive action on financial stability gives the Fed latitude to continue with rate hikes; 50 in March is not impossible as it would have been under a weak financial stability response and ongoing runs but looks very implausible – we still see 25 with a high bar to pause.

— Krishna Guha, Evercore ISI head of central bank strategy

Speculation about what the Fed’s going to do before we even see CPI is probably ill-founded. But if you look at the fed funds futures, they’re pricing in cuts in the fourth quarter and they’re pricing in the credible potential — like a 50% chance — that the Fed does nothing at the March meeting. So there’s too much noise around what else happens, what does this mean for monetary policy.

WASHINGTON: Federal Reserve (Fed) chair Jerome Powell on Wednesday (March 8) reaffirmed his message of higher and potentially faster interest rate increases, but emphasised that debate was still under way with a decision hinging on data to be issued before the US central bank’s policy meeting in two weeks.

“If – and I stress that no decision has been made on this – but if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Powell told the US House of Representatives Financial Services Committee in testimony that added a cautionary clause to the otherwise identical message he delivered to a Senate committee on Tuesday.

He emphasised the point again in response to a question explicitly about the expected outcome of the March 21-22 meeting from Representative Patrick McHenry, the Republican chair of the committee.

“We have not made any decision,” Powell said, but will be looking closely at upcoming jobs data on Friday and inflation data next week in deciding whether rate increases need to shift back into a higher gear.

As happened in the session on Tuesday, lawmakers pressed Powell about the impact Fed policy was having on the economy and whether officials were risking recession in the drive to temper price increases.

Powell acknowledged once again that the Fed was wrong in initially thinking inflation was only the result of “transitory” factors that would ease on their own, and said he was surprised as well in how the labour market has behaved through the recovery from the Covid-19 pandemic.

There have been “a bunch of firsts”, Powell said. “If we ever get this pitch again, we’ll know how to swing at it.”

Asked if he would pause interest rate increases to avoid a recession, Powell responded “I don’t do ‘yes or no’ on ‘will I pause interest rate hikes?’ That’s a serious question. I can’t tell you because I don’t know all the facts.”

The Fed’’s intense battle against inflation over the past year has reshaped financial markets, made home mortgages and other credit more costly, and aimed to cool the economy overall.

As of the start of the year it seemed to be working, with Powell at a Feb 1 news conference saying a “disinflationary process” had taken hold.

Inflation data since then has been worse than expected, and revisions to prior months showed the Fed had made less progress than thought in returning inflation to its 2% target from current levels that are more than double that.

As Powell delivered his opening remarks, new job openings data showed little progress on one measure the Fed has focused on, with employers still holding 1.9 jobs open for each unemployed person, well above pre-pandemic norms.

Other aspects of the data, however, moved gradually in ways consistent with a softer job market. Overall openings dropped slightly, the rate at which workers were quitting continued a gradual decline, and the rate of layoffs increased.

In a separate release on Wednesday, the Fed’s “Beige Book” report of anecdotal information about the economy showed the mixed picture developing on the ground, as some businesses reported freely passing along higher prices to consumers while others said they were starting to slice into profits to keep prices competitive.

Diminished corporate profit margins are something Powell said in the hearings this week should help pull inflation down after they escalated during the era of pandemic shortages.

But even if inflation has moderated from its high point last summer, it is not falling fast enough for the Fed’s liking. The Fed chief’s semi-annual testimony to Congress this week has again reset expectations of where the Fed is heading, with his blunt assessment that “the ultimate level of interest rates is likely to be higher than previously anticipated” because inflation is not falling as fast as it seemed just a few weeks ago.

Rate futures markets now expect policymakers to approve a half-percentage-point rate hike at the upcoming meeting.

Officials will also update projections on how high rates will ultimately need to be increased in order to squelch inflation. In their last set of projections, in mid-December, the median estimate of the high point of the Fed’s benchmark overnight interest rate was between 5.00% and 5.25%, versus the current 4.50%-4.75% range.

Where that ends up remains to be seen, with Powell even offering some rationale for the benefits of slower rate hikes.

After a year of rapid rate increases, the economy may still be adjusting, Powell said, an argument for allowing more data to accumulate.

“We know that slowing down the pace of rate hikes this year is a way for us to see more of those effects,” Powell said. – Reuters

The Federal Reserve will likely need to raise interest rates more than expected in response to recent strong data and is prepared to move in larger steps if the “totality” of incoming information suggests tougher measures are needed to control inflation, Fed Chair Jerome Powell told U.S. lawmakers on Tuesday.

“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” the U.S. central bank chief said in his semi-annual testimony before the Senate Banking Committee.

While some of that unexpected economic strength may have been due to warm weather and other seasonal effects, Powell said it may also be a sign the Fed needs to do more to temper inflation, perhaps even returning to larger rate increases than the quarter-percentage-point steps officials had been intending to use going forward.

“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Powell said.

The comments were Powell’s first since inflation unexpectedly jumped in January, and marked a stark acknowledgement that the “disinflationary process” he spoke of repeatedly in a Feb. 1 news conference was not unfolding smoothly.

Senators responded with a broad set of questions and pointed criticism around whether the Fed was diagnosing the inflation problem correctly and if price pressures could be tamed without significant damage to economic growth and the job market.

Democrats on the committee focused on the role high corporate profits may be playing in persistent inflation, with Senator Elizabeth Warren of Massachusetts charging that the Fed was “gambling with people’s lives” through rate hikes that, by the central bank’s most recent projections, would lead the unemployment rate to increase by more than a percentage point – a loss associated in the past with economic recessions.

“You claim there is only one solution: Lay off millions of workers,” Warren said.

“Will working people be better off if we just walk away from our jobs and inflation rebounds?” Powell retorted.

“Raising interest rates certainly won’t stop business from exploiting all these crises to jack up prices,” said Senator Sherrod Brown, a Democrat from Ohio who chairs the committee.

Republicans focused on whether energy policy was restricting supply and keeping prices higher than needed, and whether restrained federal spending could help the Fed’s cause.

“The only way to get this sticky inflation down is to attack it at the monetary side and the fiscal side. The more we help on the fiscal side, the fewer people you will have to throw out of work,” said Senator John Kennedy, a Republican from Louisiana.

“It could work out that way,” said Powell, who at a separate point in the hearing agreed with Democratic lawmakers’ assertions that lower corporate profits could help lower inflation, and with Republicans’ arguments that more energy production could help lower prices.

“It’s not for us to point fingers,” Reuters quoted the Fed chief saying.

‘SURPRISINGLY HAWKISH’

Powell’s remarks, virtually assuring that Fed officials will project a higher endpoint for the central bank’s benchmark overnight interest rate at the upcoming March 21-22 meeting, sparked a quick repricing in bond markets as investors boosted bets that the Fed would approve a half-percentage-point rate hike when they meet in two weeks.

The Fed’s policy rate is currently in the 4.50%-4.75% range. As of December, officials saw that rate rising to a peak of around 5.1%, a level investors expect may move at least half a percentage point higher now.

Equity markets added to initial losses and ended the day sharply lower, with the S&P 500 (.SPX) index dropping more than 1.5%. The U.S. dollar also rose, and yields on the 2-year Treasury climbed above 5% – the highest since 2007.

Powell’s statement was “surprisingly hawkish,” said Michael Brown, a market analyst with TraderX in London. With a 50-basis-point rate hike now in play, Brown said a strong monthly jobs report on Friday would likely lead to “calls for a 6% terminal rate,” nearly a percentage point higher than Fed officials had projected as of December.

The March 10 release of the Labor Department’s jobs report for February and an inflation report next week were cited by Powell as important in shaping what the Fed does at its next meeting.

Powell will testify again on Wednesday before the U.S. House of Representatives Financial Services Committee.

‘LONG WAY TO GO’

The hearing and Powell’s testimony honed in on an issue that is now at the center of the Fed’s discussions as officials try to determine whether recent data will prove to be a “blip,” or end up signaling that inflation remains stickier than thought and warrants a tougher response from the Fed.

In his testimony, Powell noted that much of the impact of the central bank’s monetary policy may still be in the pipeline, with the labor market still sustaining a 3.4% unemployment rate not seen since 1969, and strong wage gains.

While Powell said he thought the Fed’s 2% inflation target could still be met without dealing a major blow to the U.S. labor market, he acknowledged on Tuesday that “there will very likely be some softening in labor market conditions.”

How much remains unclear, but Powell said the focus will remain more squarely on how inflation behaves.

Inflation has fallen since Powell’s last appearances before Congress. After topping out at an annual rate of 9.1% in June, the Consumer Price Index 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 that remains too high, Powell said.

“The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” Powell said, adding later in the hearing that “the social costs of failure are very, very high.”