Powell's rate reduction and inflation testimony will set election year stage.

Federal Reserve Chair Jerome Powell will brief U.S. lawmakers on Wednesday on the economy and interest rate cuts in a politically charged election year. Asset values from stocks to crypto to homes are rising, inflation is still too high, and "exuberance" is creeping into the conversation.

With the unemployment rate at 3.7%, inflation near the Fed's 2% objective, and the economy growing despite restrictive credit conditions, his outlook is positive. With recent inflation readings stickier than expected in key aspects, some Fed officials and outside observers worry the U.S. economy is too robust for price pressures to entirely fade, arguing for rate decreases to be delayed.

Powell begins two days of testimony with a 10 a.m. ET hearing before the House Financial Services Committee, explaining to lawmakers who face inflation-weary voters this November why he is confident price pressures will keep easing without upending the job market or why the window for a "soft landing" may shorten.

The best-case scenario "is hardly assured," Atlanta Fed President Raphael Bostic said Monday in the last policymaker comments before Powell's House appearance. Bostic worried that "pent-up exuberance" among firms could boost spending and inflation if the Fed cuts rates too fast.

Three decades ago, former Fed chair Alan Greenspan warned out "irrational exuberance" propelling a technological market bubble. Even while the Fed has maintained its policy rate stable since July at 5.25%-5.5%, the highest in more than 20 years, financial conditions have eased and asset values have risen on anticipation of Fed rate cuts, which might make inflation tougher to control

Investors will watch Powell's House speech and Thursday Senate Banking Committee hearing for any attempts to change rate-cut expectations to June and highlight the inflation fight is ongoing.

Since the Fed's Jan. 30-31 meeting, data has accumulated in a tit-for-tat fashion: Reports bolstering the soft-landing narrative, such as Tuesday's services price expansion or signs of slowing consumer spending, have been counterbalanced by others showing inflation stuck in significant ways, such as rising shelter costs, or unexpected economic strength, such as January's outsized gain of more than 350,000 jobs.

Numerous economists believe the Fed's stance will change toward fewer and later rate decreases. Citi analysts on Tuesday saw "a much less benign environment where high inflation is increasingly likely to keep policy rates elevated until activity slows more sharply." This week's hearings will contrast with Powell's June congressional testimony when inflation was still double the Fed's 2% objective and policymakers expected more rate hikes. Following month, the likely last rate hike was approved.

Powell has fostered relationships with Democratic and Republican lawmakers as chair. His reputation as a centrist Republican who was appointed Fed governor by former President Barack Obama, a Democrat, raised to chair by former President Donald Trump, a Republican, and given a second four-year term by President Joe Biden, another Democrat, has helped.

The deep U.S. cultural divide over abortion and immigration may dominate the campaign, but the Fed's decisions could determine whether Biden and Trump's likely rematch occurs in an environment of low inflation, low unemployment, and falling interest rates that favors an incumbent or in more difficult conditions.

Republicans control a divided House, which faces voters in November. Some Democratic-led Senate members are up for reelection, including Ohio Chair Sherrod Brown, who has encouraged Powell to decrease rates given the inflation drop. Powell has been setting the stage for rate reduction since late last year, but he hasn't committed.

Our economy is solid. Growth is steady. The labour market is strong: 3.7% unemployment "Powell's last public monetary policy comments were made in an early February 60 Minutes interview. "Give it time and see if the facts show that inflation is falling to 2% sustainably.That question needs significant consideration."