In Washington, the Federal Reserve has adopted a cautious approach to interest rate adjustments, choosing to observe economic developments before making any decisions to lower its key interest rate. Federal Reserve Chair, Jerome Powell, expressed this stance during a testimony before the House Financial Services Committee, in direct contrast to President Donald Trump’s calls for immediate rate reductions.
Powell mentioned that the Federal Reserve is currently positioned to wait and understand the potential direction of the economy, emphasizing that adjustments to their policy will only be considered once more information is gathered. Several Republican members pressured Powell during the hearing to consider swift reductions in borrowing costs, anticipating a decision at the next meeting scheduled for the end of July. Despite this pressure, the hearing proceeded civilly, with Powell refraining from facing substantial criticism for maintaining the current interest rate.
Both Democratic and Republican committee members commended Powell for his focus on the Federal Reserve’s dual goals of controlling inflation and maximizing employment. Powell has often highlighted the support he receives from Congress as a defense against President Trump’s criticisms.
Early on Tuesday, President Trump criticized Powell on social media, urging Congress to scrutinize Powell’s leadership and predicting that his decisions would have long-term negative impacts. Several Republican committee members questioned Powell’s reasoning for not lowering borrowing costs, to which Powell responded that most economists predict tariffs will increase inflation. Consequently, Federal Reserve policymakers prefer to wait and observe the economic changes over upcoming months before making any policy modifications.
Powell indicated that although tariffs are expected to heighten inflation, the extent of their effect remains uncertain. He noted that if inflation appears weaker than anticipated, there may be grounds for a more prompt rate reduction. A significant increase in the unemployment rate might also necessitate a quicker reduction in borrowing costs. Specifically questioned about potential rate cuts in July, Powell refrained from making comments.
Anticipating the upcoming inflation reports in June and subsequent months, Powell expects the tariffs’ impact on prices to become apparent. When asked by Rep. Josh Gottheimer of New Jersey about whether President Trump’s criticism influences the Fed’s decisions, Powell stressed that their aim is to benefit the American public’s economic outlook, dismissing other influences as distractions.
The Federal Reserve’s 19-member committee, led by Powell, decides on altering borrowing costs. They tend to increase rates to combat inflation and decrease them to stimulate borrowing and spending when the economy weakens. Recently, the committee decided unanimously to maintain the current rate, though projections indicated differing opinions on future rate cuts.
Powell acknowledged that tariff-induced inflation might be temporary or could potentially prompt ongoing inflation concerns. The obligation of the Federal Reserve, as he mentioned, is to prevent short-term inflation from escalating into a persistent issue. During a prior news conference, Powell hinted that no rate cut would occur before September due to monitoring the economy’s response to the tariffs.
Despite this cautious approach, some members of the Federal Reserve’s governing board, such as Michelle Bowman and Christopher Waller, suggested that a rate cut could be plausible as soon as July. Both Bowman and Waller were appointed by Trump, with Waller being a possible candidate to succeed Powell when his term ends in May. However, officials like Beth Hammack, from the Cleveland branch, advised that, due to economic uncertainties, rates might remain unchanged for some time.
President Trump has been consistently urging for rate cuts, hoping to reduce the government’s interest payment burden on the national debt. Yet historically, the Federal Reserve has avoided considering financing costs of the government in its rate decisions, focusing instead on economic health and inflation levels. Waller emphasized in a Friday interview that reducing borrowing costs is not the Federal Reserve’s responsibility, and it rests upon Congress and the White House to manage the budget deficit.
In recent discussions, President Trump reiterated incorrect claims on social media regarding the European Central Bank’s rate cuts compared to the Fed’s actions. Over the past year, both the European Central Bank and the Federal Reserve have lowered their rates, with concerns of tariff-induced inflation largely influencing the Fed’s current pause on rate cuts. However, inflation rates have been subdued this year, evidenced by a mere 0.1% rise in the consumer price index from April to May.