Powell Testifies Before Congress: Why the Delay in Rate Cuts?
Federal Reserve Chair Jerome Powell testified before Congress on Tuesday, admitting that the Federal Reserve was ready to cut rates if not for the impact of the Trump administration's resumption of tariff measures in early April. He pointed out that current economic data supports a rate cut, but the potential inflationary impact of tariffs has caused policymakers to press the "pause button."
During the House Financial Services Committee hearing, Powell candidly stated, "Based on current data, we would likely have already reduced rates to a neutral level, or even carried out one or two rate cuts." However, he added that with expectations that tariffs will drive price increases in the coming months, the Federal Reserve must remain cautious.
Responding to Trump's Criticism: Policy Independence Unaffected
These comments are also seen as a direct response to Trump's recent harsh criticism. Trump had lambasted Powell as "stupid and stubborn" on social media and called on Congress to "deal with" the Federal Reserve Chair.
Powell remained calm in response to these political comments during the hearing, emphasizing that the Federal Reserve will maintain its independence and continue to focus on fulfilling its dual mandate of price stability and maximum employment. "We will not be swayed by external remarks; all policy decisions will be data-based," he asserted.
July Rate Cut Uncertain, Market Bets on September
When asked by legislators whether a rate cut would be initiated in July, Powell did not provide a definitive answer. He stated that policy direction will depend on upcoming inflation and employment data, noting, "If inflation remains controlled, we will be more inclined to lower rates sooner rather than later."
Even though Vice Chair Bowman and Governor Waller recently signaled potential action in July, market sentiment remains cautious. According to the CME FedWatch tool, investors currently assign only an 18.6% probability to a July rate cut, while the probability for a September cut is as high as 87%.
Business Confidence Under Pressure, Economic Growth Slows
Powell also pointed out that U.S. businesses are gradually feeling the pressure from tariffs. "Many companies are still clearing inventory, but it is expected that by the third quarter, rising import costs will directly impact their operations and pricing strategies."
According to the latest data, U.S. GDP declined by an annualized 0.2% in the first quarter, with companies accelerating import activities before the tariffs took effect, causing import volumes to surge by 42.6%. Despite the slowdown in economic growth, Powell noted that the labor market remains stable, with the unemployment rate holding at 4.2% in May. Both wage growth and labor force participation rates have slowed slightly but remain in healthy ranges.
Inflation Above Target, Expectations Warming
Powell specifically noted that the current core PCE inflation rate rose by 2.6% year-on-year in May, significantly above the 2% policy target. He also cautioned that short-term inflation expectations are heating up—"whether through market pricing or consumer and business survey results, there is rising concern about future price increases."
As inflation expectations have a critical impact on interest rate policy, Powell asserted that the Federal Reserve will closely monitor inflation and employment data for June and July before making the next policy adjustments.
Next Phase: July Meeting and Inflation Report
Powell expects the next Federal Reserve policy meeting to take place at the end of July, at which time policymakers will have more comprehensive economic data. He will also continue to testify in the Senate on Wednesday, with public attention focusing on whether the upcoming inflation report issues more dovish signals.
Despite ongoing political turmoil, the Federal Reserve insists on data anchoring. Powell's remarks indicate that the Federal Reserve is still in a "watch and respond" strategy phase, prompting market participants to closely watch third-quarter economic and price performances to gauge future policy directions.
