Powell stated that the Federal Reserve has not lowered interest rates so far due to the rising inflation outlook and the uncertainty brought by tariffs.
Written by: Li Dan, Wall Street Insights
On the first day of a "special" congressional hearing on Federal Reserve monetary policy, Fed Chairman Powell did not comment on the possibility of a rate cut at the next Fed meeting in July, reiterating the need to see more data to assess how high tariffs would impact inflation. He pointed out that the expectation of tariffs pushing up inflation is why the Fed has paused rate cuts so far, although he does not rule out the possibility that the impact of tariffs on inflation may not be as significant as expected, and he does not exclude the possibility of an earlier rate cut.
On Tuesday, June 24, during the Q&A session of the House Financial Services Committee hearing, a congressman asked about the possibility of a rate cut in July mentioned by Fed Governor Waller last Friday. Powell said, "Many paths are possible." He indicated that inflation might not be as strong as anticipated, and a decline in inflation along with a weak labor market could mean the Fed might cut rates earlier.
Powell later stated that data shows tariffs will impact American consumers in at least some industries. He said, "We believe we should start to see" the impact of tariffs on inflation in the data for June and July. "If not, we will learn from it."
Powell expressed a "completely open" attitude towards the view that "the impact of tariffs on inflation will be lower." If the impact of tariffs on consumer prices is less than the Fed's expectations, it would have a substantial effect on the Fed's monetary policy.
Subsequently, Powell reiterated that he expects tariffs to have a significant impact on prices during June, July, and August. If no impact is observed, it would be a lesson learned. "We can only know by seeing it firsthand, but I believe we will learn as we go."
After Powell mentioned the possibility of an earlier rate cut and suggested that if the impact of tariffs on inflation is lower than expected, it would drive a rate cut, U.S. stock markets saw a decline in Treasury yields towards the end of the morning session. The benchmark 10-year U.S. Treasury yield fell below 4.30%, and the more rate-sensitive two-year Treasury yield dropped below 3.81%, both hitting their lowest levels in over a month after Powell's hearing. Analysts believe that Powell did not rule out the possibility of a rate cut in July during this hearing, and more importantly, he did not exclude the possibility that inflation might weaken.
"The New Federal Reserve News Agency": Powell does not rule out the possibility of a July rate cut but suggests it is more likely to wait until at least September
Journalist Nick Timiraos, known as "The New Federal Reserve News Agency," pointed out in an article that Powell told lawmakers during this hearing that if it weren't for concerns that higher tariffs might undermine the Fed's years-long efforts to combat inflation, recent economic data would likely justify continuing rate cuts. Powell believes that broker activity is robust, allowing Fed officials to carefully analyze data to determine whether to restart rate cuts.
The article stated:
"Powell did not explicitly rule out the possibility of a rate cut next month (July), but did not provide specific details. However, in response to lawmakers' questions, he suggested that Fed officials are more likely to wait until at least the September meeting to see whether the price increases driven by tariffs are lower than expected before resuming rate cuts."
The article quoted Powell as saying:
"If it turns out that inflation pressures are indeed under control, we will cut rates as soon as possible, rather than later, but I don't want to point to a specific meeting."
Immediately following this statement, Powell added, "I think we don't need to rush because the economy is still strong."
The decision not to cut rates is due to the forecast of rising inflation this year and the uncertainty brought by tariffs
During the hearing, a congressman asked about the changes in the predictions of Federal Open Market Committee (FOMC) members since March. Powell stated that the changes in their inflation expectations primarily stem from tariffs.
Powell indicated that the vast majority of FOMC members believe that a rate cut later this year would be appropriate, but he noted that the economic outlook is "very uncertain."
A congressman mentioned the impact of tariffs from the Trump administration and asked whether the Fed officials had considered this in their assumptions. Powell stated that they try to publicly disclose their assumptions in speeches but do not comment on policy. Even if not explicitly stated in the quarterly updated economic outlook, officials discuss their assumptions in their speeches.
A congressman asked why the Fed could not cut rates like other central banks. Powell responded that all professional forecasters outside the Fed expect inflation in the U.S. to rise this year, which is why the Fed has not taken action.
Subsequently, a congressman criticized the Fed for raising rates too late during Biden's presidency and cutting rates too late after Trump took office. In response, Powell directly attributed the Fed's decision to not cut rates so far to the uncertainty brought by tariffs.
Powell later mentioned that uncertainty is part of the reason the Fed has paused rate cuts. He noted that uncertainty peaked in April and has since declined. He stated that the business community "feels more positive" now.
In his prepared testimony released before the hearing, Powell pointed out that short-term inflation expectations have risen in recent months, with tariffs being a key driving factor, while most long-term inflation expectation indicators remain consistent with the Fed's 2% inflation target. The impact of tariffs on inflation may be temporary, but it could also be more persistent, depending on the effects of the tariffs.
Long-term interest rate policy does not affect supply and demand in the real estate market; interest rates are at a moderately restrictive level
A congressman asked whether the Fed's policy has restricted housing supply. Powell stated that the Fed cannot influence the longer-term issue of housing supply shortages in the U.S. He acknowledged that a long-term housing shortage exists, and the Fed has no power over it. The Fed's best course of action is to reduce inflation, thereby allowing interest rates in related markets to decline.
Powell pointed out that sectors sensitive to interest rates, such as real estate, are indeed affected by Fed policy, but "this is part of restoring overall price stability." In the long run, the Fed's policy will not affect the supply and demand for housing.
Powell noted that inflation related to housing costs has been very "sticky," but it has recently declined, which is "very good news." Inflation related to housing rentals is now decreasing quite regularly.
Powell believes that reducing housing inflation "just takes time." The effects of declining rents may take three to four years to reflect in price indicators.
A congressman later mentioned issues in the real estate market, stating that many homeowners seem to be "trapped" because they do not want to sell their homes due to low interest rates from a few years ago. Powell acknowledged that "people are indeed trapped." However, he reiterated that the Fed's primary responsibility is to keep the inflation rate consistently at 2% and maintain it at that level over the long term.
Powell stated that current interest rates are at a modestly restrictive level, rather than a moderately restrictive level.
The rate cut in September last year was due to concerns about a significant rise in unemployment; decisions will not consider political factors
A congressman asked about the debt issues arising from the Trump administration's massive tax cuts and spending plans, and whether this would weaken the U.S.'s ability to respond to future economic downturns. Powell stated that in such a scenario, the Fed would have significant room to cut rates.
Powell subsequently reiterated his view that the U.S. federal budget has been on an unsustainable path "for some time."
A congressman asked why the Fed cut rates by 50 basis points last September instead of 25 basis points. Powell explained that at that time, the Fed was concerned about a significant rise in unemployment. Historical experience shows that a significant rise in unemployment is often associated with a higher risk of economic recession.
Powell stated that the decisions made at that time "were all related to the labor market" and were not politically motivated. He pointed out that the Fed has been criticized for being slow in its monetary easing actions.
Powell told lawmakers that the Fed does not consider political factors when deciding on interest rates.
There are no signs of weakness in the labor market; a strong economy allows for a pause in rate cuts
A congressman asked how the current indicators are similar to those from last September, yet the Fed is not cutting rates now. Powell reiterated that there is a general expectation that tariffs will push up inflation. He also stated that there are currently no signs of weakness in the labor market. Given the strong economy, there is no need to rush to cut rates. "As long as the economy is strong, we can afford to pause a bit (on rate cuts)."
When discussing the decision not to cut rates, Powell stated that the Fed is simply trying to be careful and cautious regarding inflation issues. He said, "This is just a matter of being cautious."
Powell reiterated that if the labor market weakens, the Fed will act more quickly. He mentioned that if inflation is kept in check, the Fed can cut rates sooner rather than later. He does not wish to imply that the Fed will decide to cut rates at a specific FOMC meeting.
If the labor market is strong and inflation rises, rate cuts will be delayed rather than expedited
A congressman asked why the Fed's current rate-setting contradicts the so-called "first-difference" rule. According to this rule, the Fed would adjust the benchmark interest rate based on recent changes in inflation and growth forecasts.
Powell pointed out that the first-difference rule currently indicates that the Fed should raise rates. This rule "may be a bit volatile." Other rules suggest that interest rates are close to the Fed's current level. He said that if the labor market remains strong and inflation rises, "I believe we would still take rate-cutting measures, but it would be later rather than sooner."
At least part of the tariffs will be borne by consumers; price stability has not yet been fully restored
A congressman asked about the potential lag in the impact of tariffs on inflation. Powell stated that retailers often mention the existence of a lag. The Fed simply does not yet know how much of the tariff impact will be passed on to consumers.
A congressman asked whether consumers would bear the cost of tariffs. Powell indicated that initially, the importers would bear the cost of tariffs. However, over time, five different participants will bear the costs: manufacturers, exporters, retailers, and consumers. He stated that data shows at least part of the tariffs will be borne by consumers.
When asked about the impact of tariffs on small businesses, Powell noted that small businesses typically import a single product, and these businesses are likely to be more affected than others.
Powell stated that the Fed "has not yet fully restored price stability." The Fed needs to act cautiously to prevent another inflation shock.
Comments on tariff policy are not the Fed's responsibility
A congressman urged Powell to comment on whether he believes Trump's tariff policy is "coherent." Powell repeatedly declined to comment.
A congressman complained that the tariff policy is hurting the business community and demanded an answer from Powell regarding the tariff policy, asking, "Why are you avoiding the tariff struggle?" He also asked, "Are you afraid of Trump? Why are you not addressing this issue?"
Powell responded, "To be honest, this is not our (the Fed's) responsibility at all. We are not an institution that comments on or analyzes the president's decisions."
The economy will slow down this year; immigration is one of the reasons, and AI has the potential to replace a large number of jobs
A congressman mentioned the Trump administration's policy of expelling illegal immigrants, arguing that this policy has caused "collateral damage" in sectors that urgently need workers, especially in agriculture, and asked what impact this policy has on the economy.
Powell replied that immigration is also an area that the Fed is not responsible for. He stated that the Fed is "following the natural course" regarding changes in immigration policy, which has reduced labor growth while demand for workers is also declining.
Powell expects that the U.S. economy will slow down this year, with immigration issues being one of the reasons.
Powell stated that economists in the labor field indeed believe that the native-born population in the U.S. is "likely" to be unable to meet labor demand in the coming years. Productivity may improve, thereby reducing the demand for workers, but "I wouldn't count on that."
Powell indicated that he does not expect artificial intelligence (AI) technology to bring widespread productivity benefits. He believes that AI may take longer to promote productivity growth, or that the impact of AI is not as significant as people imagine. He acknowledged the possibility that "AI could replace a large number of jobs."
When asked about the impact of AI, Powell pointed out that economists are analyzing its effects extensively. Currently, its impact is "unknown." He has heard some CEOs of companies say that there may be significant layoffs due to AI, "but I think we are not aware of that."
U.S. Oil Industry Focuses More on Investment Returns; The "Shock Absorber" View of Rising Oil Prices is Questioned
A congressman asked about the risks of global energy price fluctuations, stating that oil prices could rise to $120 per barrel.
Powell said, "We will definitely feel that."
Powell noted that people's thinking about the concept of U.S. energy independence is evolving. A few years ago, there was a view that if energy prices soared, the U.S. would have a "natural shock absorber" because the domestic energy industry "would only increase production." This would prevent sustained oil price shocks similar to those in the 1970s.
He then stated, "Now, that (view) is actually being questioned." He emphasized that after suffering from the impacts of over-investment, the U.S. energy industry is "more cautious and focused on investment returns." He referred to the oil industry downturn in the mid-2010s.
Powell said that if oil prices soar, the Fed will pay attention to the overall inflation situation.
As Long as They Meet "Safe and Sound" Principles, Banks Can Freely Engage in Cryptocurrency Activities
One of the Republican leaders in cryptocurrency legislation, Congressman Bryan Steil, asked about the Fed's decision to eliminate reputational risk in bank regulation.
Powell stated that the Fed recognizes that de-banking is a real issue that needs to be addressed. As long as banks adhere to their own "safe and sound" principles, they can freely provide services to cryptocurrency companies and engage in cryptocurrency activities.
Powell mentioned that there has been a significant change in people's "attitude" towards cryptocurrencies and expects more activity in this area. He noted that Congress is making good progress on the legislative process for a stablecoin framework.
Powell stated that the Fed does not have the authority to purchase Bitcoin and does not seek congressional approval to do so.
The Dollar Remains the Top Safe-Haven Currency; April U.S. Treasury Volatility Did Not Affect It; Claims of Dollar Decline Are Premature and Exaggerated
When asked about the dollar's safe-haven status and overseas demand for U.S. Treasuries, Powell stated that the dollar's safe-haven status remains unchanged, and it is still the number one safe-haven currency.
He warned against prematurely claiming that this safe-haven status has changed, saying, "We need to be cautious about these suddenly emerging claims."
Regarding the dollar as a reserve currency, Powell stated that the Fed's responsibility is to maintain price stability over the long term. He noted that the rule of law, price stability, and open capital markets are key to the dollar becoming the world's reserve currency.
A congressman asked whether he believes the volatility in the U.S. Treasury market in April has harmed the dollar's global standing. Powell agreed, stating that it has not harmed the dollar's global position.
Powell said that maintaining the dollar's dominant position "is not our formal responsibility," although it is a concern for the Fed. "We certainly do not want to undermine that." He pointed out that the Treasury plays a major role in dollar matters.
A congressman mentioned that the dollar fell during Trump's presidency and asked if we are currently in a period of dollar decline. Powell responded, "I wouldn't say that," adding, "The dollar remains the number one safe-haven currency. I think these claims about a dollar decline are premature and somewhat exaggerated."
Relaxing SLR Will Encourage Banks to Participate in Treasury Trading
A congressman asked about the key regulatory metric for the banking industry, the Supplementary Leverage Ratio (SLR). Currently, the focus of relaxing financial industry regulations is on easing SLR rules.
Powell stated that when the SLR is binding, it does indeed hinder banks from participating in activities like Treasury trading, "it prevents banks from engaging in low-profit, relatively safe activities, such as acting as intermediaries in the Treasury market." He indicated that relaxing this measure should encourage more banks to participate. However, Powell did not provide a numerical estimate of how significant this impact would be.
When the SLR issue came up again, Powell said, "I have always believed that if we had a leverage ratio as a safeguard rather than a binding constraint, the situation would be better," as the latter weakens banks' willingness to hold U.S. Treasuries.
The Fed and other banking regulators are expected to announce a plan this week to lower the so-called "Enhanced Supplementary Leverage Ratio (eSLR)," which requires banks to hold a certain percentage of capital based on their asset size.
CRE Situation is Improving; Private Credit is Worth Monitoring Closely
A congressman asked about banking regulation issues. Powell responded that the Fed's Vice Chair for Supervision, Randal Quarles, is pushing for more reforms.
A congressman inquired about the sequence of changes to bank capital requirements. Powell stated that this will be determined by Quarles.
When discussing risks to financial stability, Powell stated, "There are many risks that need to be monitored to prevent them from getting out of control." He pointed out that one of these is commercial real estate (CRE).
Powell speculated that in the current environment, banks may be "risk-averse." Current asset prices are high, but the leverage ratios of banks, households, and businesses are not that high.
Powell noted that the issues in CRE have existed for five years, and the Fed is working to address this problem, making good progress, with the situation improving and not deteriorating.
Powell believes that, overall, there is no need to worry about financial stability. The private credit market has been growing rapidly and has not experienced a "real recession," making it an area worth close monitoring by regulators. Credit conditions for small businesses are slightly tighter.
Trump's Threats Have No Effect on the Fed's Operations; Lack of Independence Could Harm the Fed's Credibility in Controlling Inflation
A congressman asked whether he is concerned that the Trump administration's budget cuts and staffing reductions at the Bureau of Labor Statistics will affect economic data statistics. Powell stated that there has been "some regression" in this area, and understanding the economic situation is "very important." He also mentioned that investing in data is a good investment.
A congressman asked how Trump's threats affect the Fed's personnel in fulfilling their government duties. Powell said, "These threats have no effect. We are fulfilling our responsibilities."
A congressman asked whether the U.S. president can appoint himself as the Fed chair. This question was clearly in response to Trump's public criticism of the Fed for not cutting rates, jokingly asking, "Can I appoint myself as Fed chair? I would do a much better job than these people."
In response to these questions, Powell stated, "I don't know," adding that this "is not my issue. I won't speculate."
A congressman emphasized the importance of the Fed's independence and asked Powell what his biggest concern would be if his successor, the next Fed chair, cannot maintain independence.
Powell stated that the Fed's credibility in maintaining price stability is crucial. If that credibility is lost, long-term interest rates will rise, and maintaining that credibility will come at a "high cost."
Powell revealed that he has privately heard some lawmakers express that the Fed's decision to keep rates unchanged is correct.
Powell stated that if the Fed ventures into areas outside its responsibilities, its independence will face significant risks. "I agree that climate issues are one of the biggest risks."
Powell acknowledged that climate issues are an important topic that government officials should consider but pointed out that historically, the Fed has not played any role in climate policy. He mentioned that the Fed is considering rescinding previous regulatory guidance for banks to consider climate risks.
A congressman mentioned a proposal from the Republican Party that would set the Fed's salary cap at 70% of the salaries of non-monetary sector employees of the Federal Deposit Insurance Corporation (FDIC). Powell stated that such a proposal would make it more difficult to attract and retain employees and would break the "moat" that has allowed the Fed to manage its own affairs for 90 years. He said that salary cuts would make it harder for the Fed to control its personnel size.
At the Current Pace, Balance Sheet Reduction Can Be Maintained for Quite Some Time
Regarding the reduction of the balance sheet (balance sheet normalization), Powell stated that the Fed is on track with this process. The Fed still has room for balance sheet reduction and can "maintain it for quite some time" at the current pace.
Powell noted, "We still have some work to do on balance sheet reduction," but he believes that the size of the Fed's balance sheet will not fall back to $4 trillion.
Commentary points out that due to super-easy monetary policy, the Fed's balance sheet peaked at $9 trillion in 2022, and the current size is $6.7 trillion, higher than the approximately $4.2 trillion before the COVID-19 pandemic.
Powell stated that the Fed aims to maintain a sufficient reserves framework to ensure adequate liquidity.
A congressman asked about the impact of balance sheet reduction on mortgage-backed securities (MBS) in the market. Powell believes the impact is not significant.
The Issue of Unsustainable Debt Growth Will Have More Severe Consequences if Delayed Too Long
Powell reiterated his view during the hearing that for "some time," the U.S. federal government's budget and debt growth have been on an unsustainable path. He did not comment further on fiscal policy.
Subsequently, a congressman asked where the critical point is for U.S. debt to reach an irreversible path. Powell stated that there is currently no conclusion. Commentary notes that U.S. Treasury Secretary Janet Yellen previously expressed a similar view. She stated last month during a House hearing that it is difficult to predict when the market will "rebel."
A congressman asked what impact unsustainable U.S. debt will have on the economy.
Powell stated that this will lead to rising long-term interest rates, and Congress will ultimately have to take action to control the deficit. "If we wait too long to address the debt issue, the consequences will be more severe."
Not Speculating on the Economic Impact of the Israel-Iran Conflict; Adequate Resources Prepared to Address Cybersecurity Threats Related to Iran
Powell stated that he does not want to speculate on the economic impact of the conflict between Israel and Iran.
A congressman asked about the potential threat of Iranian cybersecurity to the U.S. financial system. Powell stated that the Fed is urging banks to remain vigilant, and the Fed itself is also staying alert. "In the field of cybersecurity, you can never be complacent."
Powell mentioned that the Fed believes it has sufficient resources to prepare for cybersecurity threats.
A congressman asked about President Trump's criticism of Powell. He focuses on serving the public. "Do what you think is right and accept the consequences."
Powell told lawmakers that focusing on anything outside the economy would be a distraction. "What I care about is serving the American people."
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