Powell reiterates rate cuts must wait until tariff effects clearer

Washington — Higher tariffs could begin raising inflation in early July, a period that will be key to Federal Reserve consideration of possible rate cuts, Federal Reserve chair Jerome Powell told members of Congress on Tuesday.

Pressed by Republican members of the House financial services committee about why the Fed is not cutting rates, as US President Donald Trump has demanded, Powell said he and many at the Fed expected inflation to start rising soon, and that the central bank was in no rush to ease borrowing costs in the meantime.

Powell particularly said he would not open the door to a rate cut at the Fed’s July meeting, as two of his colleagues recently suggested, or at any other session for that matter.

“I do not want to point to a particular meeting. I don’t think we need to be in any rush”, given a strong labour market and so much uncertainty about the impact of the still-unresolved tariff debate, Powell said.

Referring to expected tariff-driven price increases, Powell said “we should start to see this over the summer, in the June number and the July number... If we don’t we are perfectly open to the idea that the pass-through (to consumers) will be less than we think, and if we do that will matter for policy.

“I think if it turns out that inflation pressures remain contained we will get to a place where we cut rates sooner than later,” he said.

With the central bank largely sidelined waiting for the outcome of the Trump administration’s tariff negotiations, Powell was quizzed repeatedly about why the central bank seemed preoccupied with that issue and had not cut rates given that inflation so far has been modest.

Powell said that Fed policy was not meant to endorse or criticise the Trump administration’s approach to trade, only to deal with an inflation impact that the Fed and forecasts more broadly expect to gather momentum over the rest of the year.

“We aren’t commenting on tariffs,” Powell said. “Our job is keeping inflation under control, and when policies have short- and medium-term, meaningful, implications, then inflation becomes our job.

“All professional forecasters I know of ... expect a meaningful increase in inflation over the course of this year,” Powell said, elaborating on the Fed’s reluctance to cut rates while major aspects of Trump’s trade policy remain unresolved.

Paring bets

In prepared testimony to the House panel, Powell noted those effects “could be short-lived, reflecting a one-time shift in the price level. It is also possible that the inflationary effects could instead be more persistent ... 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.”

After the release of Powell's testimony investors pared bets that the central bank might cut its policy interest rate as soon as the central bank’s July meeting, and increased the perceived odds for a rate reduction in September, with another to follow later in the year.

Powell’s testimony, as is usually the case with his semi-annual congressional appearances, largely tracks the Bank’s most recent policy statement, approved last week. Fed officials voted unanimously at that meeting to hold the benchmark interest rate steady in the 4.25% to 4.5% range, and gave no indication rate cuts were imminent.

New economic projections released at the time showed officials at the median expect two quarter-point rate cuts by the end of the year, in line with current market pricing.

In recent days two Fed governors, both Trump appointees, had said rates could fall as soon as the July meeting, given inflation has not yet risen in response to tariffs, while three reserve bank presidents said they still worried inflation would intensify over the rest of the year.

Trump, who appointed Powell as chair in his first term but is expected to replace him when his term ends next spring, has repeatedly called for steep rate cuts.

“We should be at least two to three points lower,” he said in a social media post ahead of the hearing, adding in reference to Powell that he hoped.

“Congress really works this very dumb, hard-headed person, over.”

Reuters