– Repeats FOMC Can Afford to Wait and Be Careful Amid Great Uncertainty
– Says FOMC Must Be ‘Careful”; Doesn’t Need To Be ‘In Any Rush’
By Steven K. Beckner
(MaceNews) – Federal Reserve Chairman Jerome Powell reiterated his belief that the Fed can afford to wait for more evidence on inflation and labor market conditions before considering a resumption of interest rate cuts, but opened the door to potential early rate reductions in congressional testimony Tuesday.
Powell, presenting his semi-annual Monetary Policy Report to Congress, allowed for the possibility of interest rate reductions “sooner rather than later” if tariffs boost inflation less than expected and/or if labor markets weaken, but said the Fed needs to be in “no rush.”
Given the “solid” state of the economy and labor markets and given “elevated uncertainty” about the outlook, the Fed can afford to “pause” and “wait” to see how much tariffs increase inflation before cutting rates, he told the House Financial Services Committee.
He emphasized the importance of data over the June-August period.
Powell has come under intense pressure from President Trump to cut rates. He is also hearing increased support for credit easing from some of his own colleagues. In recent days, Fed Governors Michelle Bowman and Christopher Waller have both expressed openness to cutting rates at the July 29-30 meeting of the Fed’s policy-making Federal Open Market Committee.
Powell did not rule out rate cuts that soon, but for now said the FOMC needs to be “prudent and alert,” “careful and cautious” as it awaits “clarity” on how economic developments unfold.
The Fed chief’s testimony comes less than a week after the FOMC voted unanimously for a fourth straight meeting to hold the funds rate in a target range of 4.25% to 4.5% after lowering that policy rate three times by a total of 100 basis points in the final three meetings of 2024.
In their revised, quarterly Summary of Economic Projections, the 19 FOMC participants projected that by year’s end, the funds rate will be at a median 3.9% (a target range of 3.75% to 4.0%) at the end of this year – the same implied 50 basis points worth of monetary easing which they had projected in their March 19 SEP.
The Fed officials reduced the amount of rate cuts they anticipate over the next two years. They projected the funds rate will end 2026 at 3.6%, up from 3.4% in the March SEP. They projected it will end 2027 at 3.4% — up from 3.1% in March.
Powell’s testimony came three days after the U.S. Air Force conducted a dramatic raid on Iran’s nuclear facilities, sparking war jitters in energy and other markets, which then subsided after Israel and Iran agreed to a ceasefire.
Powell, who was speaking on behalf of the whole FOMC, largely repeated what he said in his post-FOMC press conference in prepared testimony. He called the economy and labor markets “solid” but said inflation is still “running somewhat above our 2%” in an environment of “elevated uncertainty.”
Against that backdrop, he said, “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.”
Responding to legislators’ questions, Powell did not greatly diverge from that basic position, but did add nuances that seemed to offer hope for early rate cuts that had already been boosted in recent days by two FOMC voters.
Last Friday, Gov. Waller opined that tariffs are unlikely to have a large or persistent impact on inflation and, therefore, “We could do this (cut rates) as early as July.”
Gov. Bowman, speaking Monday, said “Should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting in order to bring it closer to its neutral setting and to sustain a healthy labor market.”
Other Fed officials have sounded more hesitant about early rate cuts, reflecting divisions on the FOMC that had appeared in the SEP “dot plot,” which showed eight FOMC participants projecting two 2025 rate cuts, but also showed seven projecting no cuts this year.
For instance, Cleveland Federal Reserve Bank President Beth Hammack said Tuesday that “waiting for additional data will help inform the path ahead. It may well be the case that policy remains on hold for quite some time before the Committee initiates very modest cuts to return policy to a neutral setting.”
“With the fed funds rate at its current modestly restrictive level, I think we’re in position to carefully assess the incoming data, the risks to the outlook, and the appropriate policy response to achieve our longer-term objectives,” she said. “I would rather be slow and move in the right direction than move quickly in the wrong one.”
Powell left room for the FOMC to move in either direction.
Asked about Waller’s comments, he replied, “Many paths are possible here..including the path you mentioned. If inflation is not as strong as we expect … that would tend to suggest cutting sooner.. If the labor market is weakening..that would also suggest cutting sooner.”
But he quickly added that if inflation were to prove higher, along with stronger GDP growth and labor market conditions, the FOMC might “cut later.”
Powell reiterated that position later in his testimony. “If we were to see inflation not coming through (higher) as our forecast and other forecasts suggested that would push us in the direction of cutting earlier,” he said. “Also … if labor markets were to weaken..that would push us in the direction of cutting earlier.”
However, he said, if the opposite were to occur, “We would still get around to cutting but it would be later rather than sooner.”
Powell told the committee that “what will actually happen with rates is going to depend on what happens with the economy,” which is “highly uncertain.” He added that most FOMC officials think “it will be appropriate to adjust rates later this year.’
Powell was repeatedly asked about the impact of both the tariff war and war between Israel and Iran on monetary policy, but he was guarded in his response.
“It’s too early to know what the economic implications might be” of the Middle East conflict, he said. “I would not want to speculate …, we are watching the situation.’
Powell conceded that, based on recent data, “You can make a good argument that (the funds rate) should be at a neutral level,” which he said would mean “a couple of cuts or more.”
However, he went on, monetary policy must be based largely on forecasts, which “expect a meaningful increase of inflation over the course of this year.”
“If just look at basic data and not look at the forecast we would have continued cutting … but this time all forecasters are forecasting some significant inflation to show up because of tariffs,” he elaborated. “We’re just saying wait (to see how much tariffs increase inflation).”
“It’s just a question of being prudent and alert … at a time when the labor market is still strong,” Powell went on. “If that were different … that would change things.”
Because of the strength of the economy, “We can take a little bit of a pause here.,” he said. “If we see inflation not show big increases, that would matter … if labor market were to weaken that would change things, … but we’re not seeing those things.”
Pressed further on when the FOMC will cut rates, Powell replied, “I would say this: if it turns out inflation pressures do remain contained, we will get to a place (where we can) cut rates sooner rather than later.” He declined to give a date.
As he has been saying all year, Powell reiterated, “I don’t think we need to be in any rush” because “the labor market is sound.”
“If the labor market weakens, that would matter,” he continued. “If we see inflation not continue to move up … ; we do expect it to move up, (but) if that does not happen we’ll learn from that.”
Given “uncertainty about the size and persistence but highly uncertain” impact of tariffs on inflation,” Powell , “we’re just being careful about inflation risks…”
“We haven’t overreacted; we haven’t reacted at all,” he went on. “We’re just being careful about what we do next.”
Powell granted, “It’s possible tariffs will come through at a much smaller level,” and he added, “We will learn as go.”
“If we see that (less inflation)) that would lead us to cut earlier; the other thing that would lead us to cut earlier is weakness in the labor market,” he repeated.
Asked again about Waller’s position that the Fed should “look through” one-time tariff effects, Powell replied, “They may prove to be one time thing, but these are decisions we want to make with some care.”
Asked about the Fed’s balance sheet, Powell said, “We have some more shrinking to do but not as far as” the $4 trillion level that prevailed before Fed purchases of securities expanded its portfolio to $9 trillion.
“We’re going at a pretty modest pace — half speed,” he continued. “We can go for a good while at this speed. We will learn as we go.”
Powell will reprise his testimony Wednesday before the Senate Banking Committee.
Meanwhile, New York Fed President John Williams told an audience, “Maintaining this modestly restrictive stance of monetary policy is entirely appropriate to achieve our maximum employment and price stability goals. It allows for time to closely analyze incoming data, assess the evolving outlook, and evaluate the balance of risks to achieving our dual mandate goals.”