Fed Chairman Jerome Powell made it clear in his testimony before the Senate Banking Committee that the central bank will remain cautious on interest rates to assess tariff impacts on the US economy.
Powell has resisted President Donald Trump’s demands to cut interest rates, saying that Trump’s tariffs risk pushing up inflation.
Labor Market Resilience
Powell said that the US economy remains stable and the labor market is nearing maximum employment. His optimism provides a clear picture for the Federal Reserve’s monetary policy, which allowed policymakers to focus on managing inflation without raising concerns about an economic slowdown or rising unemployment.
Inflationary Pressures and Uncertainties from Tariffs
Despite a strong labor market and stable economy, inflation remains the main concern for the Fed. Powell noted that the Fed’s preferred measure is likely to move up to 2.3% in May, with the core measure excluding food and energy expected to edge up to 2.6%. The respective readings for April were 2.1% and 2.5%. ⁽¹⁾
“Liberation Day” has brought a lot of uncertainty into the global economy. Powell highlighted that tariffs historically have resulted in one-time price increases and only occasionally have been responsible for longer-term inflation pressures.
Powell said that he and his FOMC colleagues will be weighing that balance and feel in no hurry to adjust policy until they have more data to view the impact of tariffs this time around. ⁽²⁾
Cautious Approach to Monetary Policy
The Fed’s approach to interest rates remains cautious. Powell stated that the Fed is well-positioned to wait and monitor more data before applying any changes to monetary policy, which led to an interest rate hold in their previous meeting. The Fed has been holding rates steady for six months, which indicates its strategy to assess tariff impacts on prices and the economy. ⁽³⁾
Powell emphasized that the central bank is willing to balance its dual mandate of achieving maximum employment and price stability, noting that “without price stability, we cannot achieve the long periods of strong labor market conditions that benefit all Americans.” ⁽⁴⁾
However, an update to individual members’ future expectations, which is the Fed’s dot plot grid, showed a split among members. Nine of the 19 officials favored either zero or one cut this year, while eight saw two cuts, and two others expected three cuts. The plot is done anonymously, so there is no way of knowing the outlook of individual members. ⁽⁵⁾
Two key FOMC members, Governor Michelle Bowman and Governor Christopher Waller, said they would favor a rate cut in July so long as the inflation data remains aligned with the Fed’s forecasts. CPI for May came in at 0.1% MoM and 2.4% YoY in May, with no increased price pressures so far from tariffs. ⁽⁶⁾
Political Pressure from Republicans
The Fed is still under pressure from the Republicans, especially President Trump, who mostly criticized Jerome Powell’s action of keeping interest rates on hold. However, Powell stated that the Fed has not been impacted by political pressure, which reaffirms the central bank’s independence.
Powell told the House Financial Services Committee that recent economic data is backward-looking, and many economists expect “a meaningful increase in inflation” over the course of this year due to tariffs. ⁽⁷⁾
The President could announce Powell’s replacement by September or October, citing people familiar with the matter. Potential replacements include Fed Governor Kevin Warsh and National Economic Council Director Kevin Hassett. ⁽⁸⁾
Trump said on Wednesday that he had three or four candidates in mind to succeed Powell, whose term as Fed Chair ends in May 2026. Trump has lashed out at the Fed’s position to keep rates on hold this week, saying the central bank is keeping borrowing costs high for the US government.
Tariffs and Economic Outlook
The impact of Trump’s tariffs remains front and center. Powell noted that inflationary pressure from tariffs could be short-lived for now, manifesting as a one-time price increase. However, the effects could be more persistent if businesses pass higher costs to consumers and inflation expectations shift.
The Fed has been monitoring the impacts of tariffs on how they impact supply chains, business and consumer sentiment to determine their next decision on interest rates.
Only one inflation report and labor market data are set to be released before the Fed’s July meeting, where markets are pricing in only a 23% probability of a cut, with a much higher probability of a reduction coming in September. ⁽⁹⁾
