EM LATAM CREDIT: Peru's Petroleos de Peru (PETRPE; B3/B/CCC+) Moody's Rating

Perhaps with the strong January CPI report in mind, Fed Chair Powell received several questions by House Financial Services Committee members on the framework review and the recent history of rate policy amid rising inflation:

• Asked about whether the Fed should have followed monetary policy rules in raising rates earlier than they did: "I will say, and I've said before, that hindsight suggests that it would have been good if we had tightened earlier. I don't know how much difference that would have made, but I'd be very careful with those rules, those rules, those rules, in the middle of last year suggested that our policy rate was a couple 100 basis points too high, you know. So we we need to they're a starting point, not an ending point." And on pandemic QE, "You look back in hindsight, we probably could have have ...  halted purchases earlier. "
• Powell asked whether the existing framework restrained the Fed from responding to rising inflation beings up the dreaded "transitory" term: "No, I'll tell you why we didn't raise rates. We thought the inflation was transitory, I can show you forecast from the end of 2021 by us, by staff, by the Blue Chip [consensus]. Everybody thought it was going to be transitory - that's why we didn't raise rates."

Separately, when asked about Pres Trump's social media post earlier in the day ("interest rates should be lowered, something which would go hand in hand with upcoming tariffs") and whether tariffs would actually cause inflation, Fed Chair Powell remains neutral: "here are many organizations, public and private, whose role is to to speculate publicly about what this might be. What we're doing is we're reserving judgment until we actually know what the policies are." 

• Later he added regarding a possible Fed policy response: "it's possible that the economy would evolve in ways that because of tariffs, or partly because of tariffs, that we would need to do something with our policy rate. But we can't know what that is until we actually know what policies are enacted. And remember, it's not just tariffs. There are significant changes to immigration policy, fiscal policy and also regulatory policy. You put all four of those, and all four of those were things that the President was elected to do. We we will then try to make an intelligent judgment about the overall effect on the economy of those and and conduct our policy accordingly."

Interestingly he noted re trend potential GDP growth: "For a long time, people thought that U.S. potential growth was a little bit below 2%. We've had five years of good productivity growth and we hope that'll continue. If that does continue then it might be 2% or 2.25% - that would be well above the SEP's 1.8% longer-run median.

Chicago Fed President Goolsbee (dove, 2025 FOMC voter) tells the NY Times that the January CPI report was "sobering". While he told the NYT that seasonal effects may have been at play as usual in January, and echoed Fed Chair Powell's post-CPI comments by saying that he would not read too much into a single inflation report, he also said “there’s no question, if we got multiple months like this, then the job is clearly not done." 

• Nonetheless, Goolsbee repeated his pre-CPI outlook on Fed rates - that they would end up a "fair bit below where we are today,” though that's conditional on "confidence that we are on path to 2 percent inflation.”
• It would appear that the January inflation data has tested but not completely shaken FOMC doves' confidence in the disinflationary story - Powell didn't express particular concern when asked in Congress earlier (“we’re close, but not there on inflation.”)
• And the only other post-CPI commenter so far - Atlanta's Bostic, more of a hawk than a dove - doesn't seem to have changed his overall rate cut view (in line with the FOMC median, 50bp this year and 50bp next), though he mentioned "uncertainty" as a reason to be less confident, with the latest inflation data suggesting that careful monitoring of conditions is still required.

Outside of Germany in Europe Pi, structural positioning is slightly more mixed:

• OAT: OAT is in  short positioning (was "very short" in our last update). Recent trade suggests long reduction.
• GILT: Gilt structural positioning remains flat. The most recent week saw trade indicative of long reduction.
• BTP: BTP has returned to its usual structural long positioning, after briefly touching flat territory in January. Shorts were set in the most recent week of trade.