Federal Reserve Chair Jerome Powell’s recent testimony to Congress has highlighted his cautious stance regarding any potential interest rate cuts. Following President Trump’s suggestion that interest rates should be lowered by two to three percentage points, alongside comments from Fed Governors Chris Waller and Michelle Bowman indicating willingness to consider a July rate cut, Powell’s non-committal approach is noteworthy. His testimony essentially reiterates the tone of last week’s Federal Open Market Committee (FOMC) statement, where the Fed maintained its policy stance.
In his statement, Powell expressed that both the labor market and overall economy remain “solid.” While acknowledging that inflation has decreased significantly from previous highs, he noted that it still exceeds the Fed’s long-term target of 2 percent. Powell indicated that the Fed is presently assessing the effects of tariffs and their potential impact on inflation before making any decisions.
He conveyed that the Fed is “well positioned to wait” for more data on the economy’s direction before contemplating adjustments to its policies. Looking ahead, many market analysts now anticipate that the Fed might hold off on rate cuts until the fourth quarter. The current market expectations include pricing in 56 basis points of rate cuts during the latter half of the year, specifically with a likely cut in September followed by another in December.
While a cautious approach is justified, particularly as July and August will likely reveal the maximum impact from tariffs, the Fed may prefer to await confirmation of softer inflation data from the Consumer Price Index (CPI) reports in October and November. An early move by the Fed could be triggered by a sharp decline in job creation. Recent reports, including the Fed’s Beige Book, have indicated a downturn in labor demand, with lower hiring, reduced hours, and layoffs creating an uncertain employment environment.
With rising initial and continuing claims, the Fed would need to see substantial evidence of weakness, such as slowed payroll growth and an uptick in unemployment rates, before considering an earlier interest rate adjustment.