Key takeaways from Fed Chair Powell's testimony

Federal Reserve Chair Jerome Powell testified before the House Financial Services Committee on Wednesday as part of his semiannual report to both chambers of Congress. He is set to appear before the Senate Banking Committee on Thursday.

Powell's testimony came just one week after the central bank paused its most aggressive rate-hiking campaign in decades. A few things that became clear: The Fed isn't done fighting inflation, the focus of new banking regulation will likely be on the biggest banks and the central bank remains attuned to its employment mandate.

Democrats repeatedly emphasized to Powell the Fed's mandate to achieve full employment, underscoring their fears of job losses if the central bank overdoes it. Meanwhile, questions from Republicans illustrated their concerns over forthcoming banking regulation. Powell doubled down on the hawkish view that the Fed isn't done battling inflation.

Here are some takeaways from Powell's testimony to House lawmakers.

The Fed held its key lending rate steady at a range of 5-5.25% in its latest meeting, but most officials hinted that two more quarter-point rate hikes might be necessary this year, according to the Fed's latest set of economic forecasts. Just days after the decision, two Fed officials called for more increases, citing persistent inflationary pressures. And on Wednesday, Powell told lawmakers it was a "pretty good guess" that the central bank would hike rates twice more this year.

Powell said "inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go," suggesting additional action from the Fed in the form of more rate hikes or at the very least holding rates steady. But he reassured lawmakers that the Fed's policy moves will continue to evolve as inflation approaches the central bank's target.

"Now we're moderating that pace, much as you might do if you were to be driving 75 miles an hour on a highway, then 50 miles an hour on a local highway, then as you get closer to your destination, you try to find that destination - you slow down even further," he said.

As Powell reaffirmed the central bank's commitment to successfully defeating inflation, he also acknowledged the Fed's employment mandate to Democrats who've criticized the Fed for its rapid rate increases. Their criticism intensified when stress in the regional banking sector emerged this spring, which prompted some of them to call for the Fed to suspend rate increases in May. The Fed hiked again that month.

During the hearing, several Democrats emphasized to Powell the Fed's mandate to achieve full employment.

"I caution against any approach in monetary policy that ignores the Fed's maximum employment mandate and results in a recession with millions of people losing their homes and jobs," said Rep. Maxine Waters, the committee's ranking member.

Powell responded to those kinds of remarks in the same way - by reminding them the labor market remains strong by many measures.

"We still have historically low unemployment rates and high employment rates now, high participation, a very strong labor market," Powell said.

A plethora of questions from Republicans had to do with forthcoming regulation on banks after the failures of three regional institutions since March. Republicans took aim at Michael Barr, the Fed's vice chair for supervision, and said the Fed should consider how new regulations would affect smaller banks.

Powell addressed the recent turbulence in the banking sector, stressing the "importance of ensuring we have the appropriate rules and supervisory practices for banks of this size." That suggested forthcoming changes in banking regulation - but the committee's chairman, Rep. Patrick McHenry, a North Carolina Republican, pushed back in his opening remarks.

"There's a great deal of uncertainty on the horizon. Uncertainty from Fed supervision and regulation is the last thing the well-capitalized banking system needs now," he said. Early in the hearing, McHenry repeatedly lambasted Barr, saying he is "injecting politics into policy."

"Excessively high capital requirements will constrain credit provision to the economy costing jobs, incomes, opportunities, and living standards," said Rep. Mike Lawler, a New York Republican. Iowa Republican Rep. Zach Nunn expressed concerns of the effect on higher capital requirements on inflation.

Except, it doesn't seem like the Fed is even considering tougher regulations on small banks.

"Any increase in the capital for the large banks will need to be justified. I don't know that there will be much of a capital increase proposed for banks other than the very large ones, but we'll have to see," Powell said. He added that the process of instituting new capital requirements - the solicitation of comments from market participants beforehand, evaluating those comments and the Fed reaching a consensus - is long.

"During this period of the next year or two when we're getting inflation back down to target and the economy is kind of normalizing, I don't think that capital changes will have much of an effect in the near term," he said. Powell added that higher capital requirements aren't "a key factor" in how the central banks looks at inflation.

Financial markets see a roughly 72% chance the Fed will hike rates by another quarter point in July, according to the CME FedWatch Tool.

The tech-heavy Nasdaq Composite slid 1.2% by the closing bell on Wednesday, on pace to fall for a third consecutive trading session following a powerful rally last week.

The Dow closed the day down by 102 points, or 0.3%, having oscillated between positive and negative territory during Powell's testimony. The S&P 500 fell about 0.5%.

A new report from Moody's Investors Service released Tuesday showed that "monthly growth in core prices remains broad-based" and that "consumer spending remains buoyed by the strong job market."

"These traits will keep additional rate hikes in the cards," said Madhavi Bokil, a senior vice president at Moody's Investors Service and one of the main authors of the report.

Retail spending rose last month, mostly driven by higher-income consumers, and employers added a robust 339,000 jobs in May. The economy still has momentum and minutes from the Fed's meeting earlier this month will show if economists at the central bank still think there will be a recession later this year. Those minutes will be released in early July.

What Fed officials decide during their July 25-26 meeting depends on what economic indicators show in the coming weeks, but it's unlikely they'll learn anything new. Still, Powell said holding rates steady was a "prudent" move, given that research shows that it takes at least a year for rising interest rates to trickle through to the broader economy. The Fed began lifting rates in March 2022.

In the hearing, Powell reiterated the view that monetary policy affects the economy with a lag, but that it's extremely difficult to nail down when exactly rising interest rates will take a deeper hold in the economy.

- CNN's Krystal Hur contributed to this report.