Powell asserts that “people will bear the consequences for a long time if we make a mistake.”
Jerome Powell, the chair of the Federal Reserve, stated this week that he is not prepared to accede to President Donald Trump’s requests that interest rates in the United States be lowered soon. What, then, would persuade him?
These three points from Powell’s congressional testimony provide insight into the prospects for lowering borrowing prices.
No rate cut is anticipated in July.
Powell is certain that, at least initially, high tariffs will raise inflation. Before determining when to lower interest rates, he wants to wait to observe how much prices increase.
Powell’s semiannual address to Congress this week stated, “We are watching to see what shows up in measured inflation.” “Someone has to pay [the tariffs].”
Powell emphasized that the economy faces a greater risk if the Fed lowers rates too quickly and inflation spikes once again than if it waits a little while longer to ensure that price pressures are kept in check.
“If we make a mistake, people will pay the cost for a long time,” he stated.
His statements contradict recent statements made by two Fed governors, Michelle Bowman and Chris Waller, who stated that if present inflation trends continue, they would be in favor of a rate cut in July.
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They have been accompanied by no other senior Fed official.
According to Michael Feroli, chief U.S. economist at J.P. Morgan, “Bowman and Waller’s recent dovish turn seems to be restricted to those two policymakers so far.”
Since December, the Fed has maintained a key U.S. interest rate at its current level. Next important meeting: July 29-30.
The June CPI report is crucial.
The June consumer price report, which is out in three weeks, is the next significant inflation reading Powell is watching. According to the Fed chief, any notable inflation brought on by tariffs should manifest during the coming months.
Powell stated, “We should start to see this over the summer, in the June numbers and the July numbers,” to refer to inflation brought on by tariffs.
The Fed would remain on hold until at least September if the June CPI increased by 0.2% or more.
A rate drop in July might be rekindled by another low reading, such as the 0.1% increase in consumer prices in May.
“We could see inflation come in not as strong as we expect, and if that were the case, it would suggest cutting sooner,” said Powell.
But he was determined not to be pinned down. “I wouldn’t want to point to a particular meeting,” he stated.
The job market is unpredictable.
In addition to its legally mandated duty to maintain low inflation, the Fed also has a crucial responsibility to maintain a robust labor market.
Powell said that if the job market significantly deteriorated, the Fed might lower rates sooner or more forcefully.
“The other thing that would lead us to want to cut earlier is if we actually did see trouble in the labor market,” Powell stated.
The labor market seems to be doing fairly well on the surface. For instance, at 4.2%, the unemployment rate is still extremely low.
However, there are new indications of stress: a slowdown in hiring, a rise in unemployment claims, and a consistent rise in the number of persons receiving unemployment insurance.
When Waller said last week that the Fed could lower rates as early as July, he noted these labor market fissures.
