Federal Reserve Chair Jerome Powell testified before Congress on Wednesday. He sounded a note of caution as he hinted at any future interest rate reductions. In his remarks for the Fed’s semiannual monetary policy report, Powell signaled that the Fed continues to develop its policy relief. He was opaque on what all these changes mean for the economy. The Fed walks a fine line with an uncertain economic future ahead. A variety of reasons, not the least of which are former President Donald Trump’s tariffs, play a role.
Under Powell’s leadership, the Federal Reserve took a historic and gutsy step by cutting its benchmark interest rate. They did reduce it by a full percentage point late last year. This action follows a year-and-a-half long pause of holding rates at their two-decade high. Now, some Fed officials—notably, Trump appointees Michelle Bowman and Christopher Waller—are advocating for more cuts. At the same time, Powell urged lawmakers to be cautious.
“Policy changes continue to evolve, and their effects on the economy remain uncertain,” Powell remarked during his testimony. He called for prudence given the uncertain economic times. It’s important to be deliberate about what changes, if any, we make to the Fed’s policy stance.
Regardless of what one thinks on U.S. – China relations, Powell was right that Trump’s aggressive tariff regime has started to echo across the economy. He further conceded that it is a question of “when,” not “if,” that these tariffs will raise consumer prices. He explained that the impacts on inflation would be temporary and would only represent a one-time change in the price level. Even so, he cautioned that some of these inflationary pressures might be more permanent in nature.
We’re beginning to see some effects. We expect to see more. Powell’s testimony underscored that the economic effects of tariffs can take time to play out. He mentioned potential inflationary pressures stemming from ongoing conflicts in the Middle East, which could further complicate the economic outlook.
Despite Trump’s calls for “supersized” rate cuts and his criticisms of the Fed on social media, Powell affirmed the institution’s independence from political pressures. “For the time being, we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance,” he said.
Economists have shared competing visions about whether a rate cut will happen in July. Yet in a recent conversation with us, Mark Zandi — chief economist at Moody’s Analytics — poured cold water on the idea. “I’d be surprised if July is when the Fed cuts again because that’s when the price increases are going to start to show up. Yet you’re going to come and saw a deep square in the middle of that? I’d be surprised,” Zandi stated.
Since then, Trump has continually lambasted Powell and the Fed. Lowering interest rates is, in his view, the only way to jumpstart economic growth. In a fiery recent social media post, he even dubbed Powell “‘Too Late’ Jerome Powell. He argued against the Fed’s hesitation in taking interest rates up to where they can’t go any further.