Powell stated that the U.S. economy is strong, the current high tariffs have no modern precedent, and their impact on inflation could be greater or smaller than expected, so the Federal Reserve is not in a hurry to act.

Written by: Li Dan

Source: Wall Street Journal

The day after a "special" congressional hearing on the Federal Reserve's monetary policy, Fed Chairman Powell again mentioned the prospect of interest rate cuts. He reiterated that there is no rush to cut rates, emphasizing that high tariffs bring significant uncertainty, pointing out that the U.S. economy is strong, and under uncertain circumstances, there is reason to act slowly, while also mentioning some factors that could drive rate cuts.

During a hearing of the U.S. Senate Committee on Banking, Housing, and Urban Affairs on Wednesday, June 25, Powell told lawmakers that future trade agreements might allow the Fed to consider rate cuts.

Regarding the Trump administration's policies, Powell stated that the economic outlook (SEP) update released by the Fed after last week's meeting reflects, to some extent, the impact of trade policies. However, the tariffs are very high, and such high tariffs have no precedent, making it difficult to predict how tariffs will affect inflation. In times of uncertainty, it is reasonable to advance monetary policy more slowly.

On inflation, Powell stated that stagflation is not a fundamental assumption of the U.S. economy, but the Fed is monitoring prices in the U.S. Over time, regulation may also lead to a slowdown in inflation.

Current high tariffs have no modern precedent; their impact on inflation will become apparent in the coming months

Powell testified that due to a lack of historical experience, Fed officials find it difficult to assess the potential impact of the Trump administration's trade policies. "There is a lack of modern experience in this regard. The scale of tariffs during President Trump's first term was only one-sixth of what it is now."

It is precisely because of the lack of precedent that the Fed currently feels uncertain about making any policy adjustments. Powell said:

"This is challenging, one reason being that there is no modern precedent, and we must remain humble in our estimates. The impact of inflation transmission may be greater or smaller than we imagine, which is why we are not in a hurry to act."

Powell stated that the Fed is waiting to see who will ultimately bear most of the tariffs and how the tariffs will be reflected in measured inflation.

Powell believes that the Trump administration's tariff measures may push inflation higher in the coming months.

Powell said that a reasonable expectation is that tariffs will cause a certain degree of inflation. He indicated that most Fed officials support a rate cut this year, and the Fed wants to observe changes in inflation over the next few months.

"Tariffs will bring some inflation. It is not apparent now, but it will become evident in the coming months."

Consumers may bear part of the tariffs; it is difficult to predict in advance; the Fed is still working to determine the impact and is waiting for more data

During a hearing in the House of Representatives on Tuesday, Powell stated that data shows at least part of the tariffs will be borne by consumers. At that time, he said that initially, importers would bear the cost of the tariffs. However, over time, five different participants will bear the burden: manufacturers, exporters, retailers, and consumers.

On Wednesday, Powell reiterated that the Fed is still working to determine the impact of tariffs on consumer prices. He said:

"The question is, who will pay for these tariffs? How much of it will be reflected in inflation? To be honest, it is difficult to predict in advance."

Powell believes that consumers may need to bear part of the cost of import tariffs. He pointed out that tariffs could cause hundreds of billions of dollars in losses each year, "of which part will be borne by consumers. We are just waiting for more relevant data."

Some Republican senators criticized Powell, characterizing tariffs as potential drivers of inflation. Among them, Senator Pete Ricketts believes that tariffs may only cause a one-time price increase and will not exacerbate inflation.

Another senator, Bernie Moreno, accused Powell of political bias, saying, "You should consider whether you are looking at this from a fiscal or political perspective because you just don't like tariffs." Powell did not respond.

However, Powell reiterated that most Fed officials do support a rate cut this year. He then stated that tariffs may not significantly raise inflation.

During the House hearing on Tuesday, Powell mentioned that the impact of tariffs on inflation might be less than expected. When asked about the possibility of a rate cut in July, Powell said that "many paths are possible," and that inflation might not be as strong as expected, with declining inflation and a weak labor market possibly indicating an earlier rate cut.

Rarely touching on fiscal issues: Congress seems to need to consider student loan debt

Powell has previously stated that the U.S. government's fiscal deficit is unsustainable. He has said that the growth of U.S. debt exceeds the growth of the economy, making it unsustainable. During this hearing, Powell again mentioned government debt.

Powell stated that the Federal Open Market Committee (FOMC) does not consider the U.S. federal government's debt issues in its monetary policy decisions. Fiscal policy can exacerbate inflationary pressures, but the Fed will not comment on such risks. The scale of U.S. debt has not affected the Fed's ability to fulfill its responsibilities.

Powell typically avoids commenting on fiscal policy. However, during Wednesday's hearing, he made a rare "exception" when discussing student loans.

Powell stated that student loan debt "seems to be an issue that Congress needs to consider." Such debt negatively impacts borrowers' ability to fully participate in economic activities, thereby dragging down the overall economy.

Powell said, "You can make various investments, and if you cannot repay the loan, you can discharge it through bankruptcy. The only exception is student loans. I want to ask whether this is a wise national policy. Those who borrow money to invest in education, we do not discharge (repayment)."

U.S. Treasury market functioning well; liquidity appropriate; the dollar remains the global reserve currency

When discussing the U.S. bond market, Powell stated that the bond market is performing well, functioning normally, and liquidity is appropriate.

Powell believes that the dollar remains the global reserve currency. He does not hold an opinion on whether the dollar is overvalued but mentioned that some believe the dollar is overvalued.

During the House hearing on Tuesday, Powell defended the dollar's global status, stating that the dollar remains the number one safe-haven currency, and the volatility in the U.S. Treasury market in April did not undermine the dollar's status.

A proposal to eliminate the interest payment mechanism on reserves will not save banks money

Powell stated that even if the mechanism for paying interest on reserves deposited at the Fed is eliminated, it will not save banks money, and restoring a scarce reserve system will be challenging and may lead to market volatility.

Powell mentioned the proposal to eliminate the interest payment mechanism on bank reserves, stating, "People fantasize that doing so will save money, but that is not the case." "If we want to return to the era of scarce reserves, it will be a long, bumpy, and turbulent road. I do not recommend that we take this path. Ample reserves mean ample liquidity, which means banks can continue to lend."

The U.S. Congress approved the aforementioned mechanism before 2006, and the Fed began paying interest on reserves held by commercial banks. Since then, one of the policy rates used by the Fed to control short-term interest rates—the interest on excess reserves (IORB), also known as the reserve balance rate—has emerged, with the IORB serving as the upper limit of the Fed's interest rate corridor, while the overnight reverse repurchase rate (ON RRP) serves as the lower limit of the corridor.

Reports about the Fed's headquarters renovation costing $2.5 billion are highly sensational

In recent months, media reports have indicated that the renovation of the Fed's headquarters building, Marriner S. Eccles, in Washington, D.C., is expected to cost about $2.5 billion. As a result, the Fed is facing pressure from external criticism. Elon Musk, who previously led the Office of Government Efficiency (DOGE), specifically mentioned this project, stating, "We should absolutely look into whether the Fed spent $2.5 billion hiring an interior designer. It's really surprising."

During Wednesday's hearing, a lawmaker questioned the renovation plan, to which Powell responded that the Fed "takes its responsibility as a steward of public funds seriously, and no one wants to renovate a historic building." He also stated that the headquarters building is neither safe nor waterproof and needs renovation, a matter that can be left to his successors.

According to media reports, the early plans for the Marriner S. Eccles building included a rooftop garden, water features, and an upgraded executive dining room. Powell stated during the hearing on Wednesday that these reports are inaccurate and sensational.

Powell said, "All the sensational content reported by the media is not part of the current plan. There is no VIP dining room, no new marble, no dedicated elevators. No new water features, no beehives, and no rooftop terrace garden."

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