The president scolds Congress members to "hit hard," the Middle East conflict continues, the Federal Reserve is divided internally, how will Powell "debate" tonight?

Author: Jin Shi Data

Federal Reserve Chairman Powell will have two opportunities this week to explain to Congress why he and most of his colleagues are determined to keep interest rates unchanged until September, ignoring Trump's ongoing calls to lower borrowing costs.

The Federal Reserve Chairman will testify before the House Financial Services Committee at 10 PM Beijing time on Tuesday and before the Senate Banking Committee at the same time on Wednesday.

Less than a week ago, Federal Reserve officials agreed to keep interest rates unchanged for the fourth consecutive meeting, and before his appearance, the U.S. recently attacked Iran, heightening concerns about soaring oil prices and global economic risks.

Trump stated in a post that he hopes Congress will "hit Powell hard" and argued that U.S. interest rates should be "at least two to three percentage points lower." Last week, the Federal Reserve maintained the benchmark federal funds rate in the range of 4.25%-4.5%.

Trump said, "For many years to come, we will pay the price for his incompetence, and the committee should take action."

Here are Powell's prepared remarks and noteworthy points from the Q&A session with Congress members:

Interest Rates and the Economy

Powell is expected to cautiously follow the message he conveyed last week, when he stated that before considering any interest rate changes, the Federal Reserve is "in a good position to wait and learn more about the possible direction of the economy."

"We want to get more data, and at the same time, we can do this because the economy remains in a solid state," Powell told reporters last week. "Ultimately, the costs of tariffs must be paid, part of which will fall on the final consumers."

So far, the tariffs imposed by the Trump administration have not led to the price increases and rising unemployment rates that policymakers warned about. In fact, economists expect this week's data to show that the Fed's preferred core inflation measure rose only 0.1% in May, marking the third consecutive month of such a rise, which would be the mildest inflation growth in three months since 2020.

Two Federal Reserve governors, Waller and Bowman, have indicated that the impact of tariffs on prices may be temporary, and they may support a rate cut in July.

James Egelhof, Chief U.S. Economist at BNP Paribas, said, "Powell seems to lack a sense of urgency to act on the possible direction of inflation, and he seems to believe that the risk of making a wrong assessment is significant."

Iran Conflict

Powell is almost certain to be asked about the potential impact of Middle Eastern events on the economy. Over the weekend, the U.S. directly joined the conflict by bombing Iran's nuclear facilities. Trump announced a ceasefire between Iran and Israel, which led to a sharp drop in oil prices to levels seen the day before Israel attacked Iran.

At last week's press conference, Powell was reserved in his comments about the conflict and its potential impacts. "Of course, we are watching developments like everyone else," he said. "We may see higher energy prices. Historically, when there is turmoil in the Middle East, you might see energy prices spike, but they often retreat afterward. These events typically do not have a lasting impact on inflation."

Political Pressure

Republican lawmakers are expected to pressure Powell to provide clear reasons for his wait-and-see stance, although some are almost certain to take a less aggressive approach.

"Chairman Powell deserves praise for successfully navigating some of the most difficult periods in modern history," said Dan Meuser, a member of the House Financial Services Committee from Pennsylvania, in a social media post over the weekend. "But with inflation cooling and a strong labor market, the benefits of a rate cut are becoming hard to ignore."

However, if other lawmakers follow Trump's lead, Powell may face more intense scrutiny. Trump's recent attacks have focused on the costs that interest rates impose on the federal government. He has also become increasingly personal, calling the Federal Reserve Chairman "one of the dumbest and most destructive people in government."

According to the Federal Reserve, when Powell met with Trump in May, he told the president that the decisions of the Federal Open Market Committee were based on "prudent, objective, and non-political analysis." He is expected to display more of this resilient attitude.

"He will appear completely calm," predicted Mark Gertler, an economics professor at New York University.

Powell may also hear encouraging words from Democrats, who may warn that the independence of the Federal Reserve is under threat from Republicans.

Banking Regulation

Federal Reserve watchers will also have the opportunity to gauge Powell's views on the ongoing key regulatory reforms. The White House is pushing a deregulation agenda, with several federal agencies working to relax rules. As part of this, Trump nominated Bowman to serve as Vice Chair for Supervision at the Federal Reserve.

On Monday, Bowman stated that it is time to re-examine a key capital buffer that some regulators and bankers believe restricts banks' trading in the $29 trillion Treasury market. According to Bloomberg, the Federal Reserve and other regulators will propose lowering the so-called "enhanced supplementary leverage ratio" (eSLR), a rule introduced in 2008 that forces banks to hold a certain amount of capital relative to their assets.

Powell may also have to answer questions about a recent proposal by Texas Republican Senator Ted Cruz to prohibit the Federal Reserve from paying interest on bank reserves. Cruz claims this move would save $1.1 trillion over ten years, but some analysts believe it would jeopardize the Federal Reserve's ability to control short-term interest rates.

Senate Banking Committee Chairman Tim Scott blocked the proposal from being attached to the Trump tax and spending plan still under consideration in Congress, but did not completely dismiss the idea.

The Federal Reserve's payment of interest on bank reserves effectively prevents banks from lending at rates below what the Federal Reserve expects, thereby setting a lower bound for overnight market rates.

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