Powell Reiterates US Fed Will Adopt a Wait-and-See Approach Before Cutting Interest Rates, Until Tariff Impact Clearly Emerges

Ahead of congressional hearings on Tuesday and Wednesday this week, the testimony released by the US Fed from Fed Chairman Powell indicated that the Fed's top official was still emphasizing a stance of patience in waiting for data and holding off on interest rate cuts.

(Source: US Fed)

Despite pressure from US President Trump, who has repeatedly called for interest rate cuts in recent days, Powell reiterated in his testimony that:the Fed is currently in a favourable position and can afford to wait and see how more economic data unfolds before considering adjusting its policy stance.

The Federal Open Market Committee (FOMC) unanimously voted last week to maintain the benchmark interest rate unchanged, but the economic forecasts released simultaneously also revealed increasingly apparent divergences: among the 19 members, seven expected no interest rate cuts this year, two anticipated one cut, and the remaining 10 projected at least two cuts.

As a recent focus, two Fed governors, Michelle Bowman and Christopher Waller, have both stated that "interest rate cuts could come as early as July." Both were appointed by Trump during his first term, with Waller often mentioned as a potential successor to the Fed Chairman position in May next year.

Of course, the key to whether the Fed will cut interest rates or not still hinges on the impact of Trump's tariff policies on the economy.

Powell stated in his testimony that short-term inflation expectations have risen in recent months, with surveys of consumers, businesses, and professional forecasters indicating tariffs as the main driving factor.The impact of policies on inflation could be transient or could persist for a longer period. Whether the latter outcome can be avoided will depend on the extent of the tariff impact, the time it takes for it to fully transmit to prices, and ultimately, whether long-term inflation expectations can remain firmly anchored.

At last week's interest rate decision press conference, Powell had predicted that the inflationary impact of tariffs would become more pronounced in the summer. He also stated in his testimony that estimates based on CPI and other data suggest the PCE price index will rise 2.3% YoY in May, with core PCE increasing 2.6%. The corresponding figures for April were 2.1% and 2.5%, respectively.

In last week's economic forecasts, the median projection of Fed officials for US core PCE this year rose to 3.1%.

Powell also reiterated in his testimony that the Fed will balance its dual mandate of full employment and price stability, but he reminded everyone that without price stability, the Fed cannot achieve a long-term robust labour market condition that benefits all Americans.

Following the release of Powell's testimony, the CME's "FedWatch" tool indicated that the probability of no interest rate cut in July slightly increased to 83%.

(Source: CME)

Attachment: Full text of Powell's testimony

Thank you for giving me the opportunity to present the Federal Reserve's Semiannual Monetary Policy Report to you.

The US Fed remains focused on achieving our dual mandate—maximum employment and price stability—for the benefit of the American people. Despite continued high uncertainty, the economic fundamentals remain solid. The unemployment rate remains low, and the labour market is at or near full employment. Inflation has pulled back significantly but remains slightly above our long-term target of 2%. We closely monitor risks affecting both aspects of our dual mandate.

Before discussing monetary policy, I will briefly review the current economic situation.

Current Economic Situation and Outlook

The latest data indicate that the economy remains robust. After achieving 2.5% growth last year, gross domestic product (GDP) reportedly declined slightly in the first quarter of this year, reflecting fluctuations in net exports due to businesses importing ahead of potential tariff measures. This unusual fluctuation has made GDP measurement challenging. Domestic private final purchases (PDFP), which exclude net exports, inventory investment, and government spending, maintained a solid growth rate of 2.5%. Within PDFP, consumer spending growth slowed somewhat, while investment in equipment and intangible assets rebounded from weakness in the fourth quarter. However, surveys of households and businesses indicate that confidence indices have declined in recent months, and uncertainty about the economic outlook has increased, primarily reflecting concerns about trade policy. How these changes will affect future spending and investment remains to be seen.

On the labour market side, the overall situation remains solid. In the first five months of this year, non-farm payrolls increased by an average of 124,000 jobs per month. The unemployment rate in May was 4.2%, remaining low and within a narrow range over the past year. Although wage growth has slowed somewhat, it still outpaces inflation. Overall, various indicators suggest that the labour market is generally in equilibrium, consistent with the goal of maximum employment. The labour market does not currently pose significant inflationary pressures. The strong employment situation in recent years has helped narrow long-standing employment and income gaps among different groups.

Inflation has pulled back significantly from its highs in mid-2022 but remains elevated compared to our long-term target of 2%. Estimates based on the Consumer Price Index (CPI) and other data indicate that the total personal consumption expenditures (PCE) price index rose 2.3% over the 12 months ending in May; excluding volatile food and energy prices, core PCE prices rose 2.6%. Short-term inflation expectations indicators have risen in recent months, as reflected in market and survey data. Consumers, businesses, and professional forecasters generally believe that tariff hikes are the main driver behind the increase in inflation expectations. However, in the medium and long-term, most inflation expectations indicators remain consistent with our 2% inflation target.

Monetary Policy

Our monetary policy actions are guided by the dual mandate of achieving "maximum employment" and "price stability." Against the backdrop of a labour market that has reached or is near maximum employment, while inflation remains somewhat elevated, the Federal Open Market Committee (FOMC) has maintained the target range for the federal funds rate at 4.25% to 4.5% since the beginning of the year. Meanwhile, we continue to reduce our holdings of US Treasuries and agency mortgage-backed securities (MBS), and have further slowed down the pace of balance sheet reduction since April to achieve a smooth transition to an ample reserves regime. We will continue to assess the appropriate stance of monetary policy based on the latest data, changes in the economic outlook, and the balance of risks.

Policy changes are still evolving, and their impact on the economy remains uncertain. The impact of tariffs will depend on their final implementation levels. In April this year, market expectations for the final tariff levels peaked and have since pulled back. Even so, tariffs imposed this year could still push up prices and dampen economic activity.

This inflationary impact could manifest as a one-time upward shift in the price level; however, there is also a possibility of more persistent inflationary pressures. Whether this outcome can be avoided depends on the scale of the tariff impact, the duration of price pass-through, and our ability to effectively anchor long-term inflation expectations.

The FOMC's responsibility is to ensure that long-term inflation expectations remain anchored, preventing a one-time price increase from evolving into a persistent inflation problem. In achieving this goal, we will balance our two mandates of "maximum employment" and "price stability," keeping in mind that without price stability, we cannot achieve a long-term strong employment situation that benefits all Americans.

At this stage, we are in a favourable position to observe the trajectory of more economic data before deciding whether to adjust our policy stance.

To conclude:

We are deeply aware that every action taken by the US Fed affects communities, families, and businesses across the country. Everything we do is in fulfillment of our mission to serve the public. The US Fed will do its utmost to achieve the goals of maximum employment and price stability.

Thank you. I am happy to take your questions.