Author: Jin Shi Data
Federal Reserve Chairman Powell will have two opportunities this week to explain to congressional lawmakers why he and most of his colleagues are determined to keep interest rates unchanged until September, disregarding Trump's continued calls to reduce borrowing costs.
The Federal Reserve Chairman will testify before the House Financial Services Committee at 10 PM Beijing time on Tuesday and before the Senate Banking Committee at the same time on Wednesday.
Less than a week ago, Fed officials agreed to keep interest rates unchanged for the fourth consecutive meeting, and before his appearance, the United States recently attacked Iran, heightening concerns about oil price spikes and global economic risks.
Trump posted that he hopes Congress will "crack down hard" on Powell and advocates that U.S. interest rates should be "at least two to three percentage points lower". Last week, the Fed kept the benchmark federal funds rate in the range of 4.25%-4.5%.
Trump said, "We will pay the price for his incompetence for many years to come, and the committee should take action."
Here are the prepared remarks and key points from Powell's Q&A with lawmakers:
Interest Rates and Economy
Powell is expected to cautiously follow the message he conveyed last week, when he stated that the Fed is "well-positioned to wait and learn more about the potential direction of the economy" before considering any rate changes.
"We want more data, and in the meantime, we can do so because the economy remains robust," Powell told reporters last week. "Ultimately, the cost of tariffs must be paid, and some of that will fall on the final consumer."
So far, tariffs imposed by the Trump administration have not brought about the price increases and unemployment rises warned by policymakers. In fact, economists expect this week's data will show the Fed's preferred core inflation index rose only 0.1% in May, the third consecutive month of such growth, which would be the most moderate three-month inflation increase since 2020.
Two Fed governors, Waller and Bowman, have indicated that tariffs' impact on prices may be temporary, and they might support a rate cut in July.
James Egelhof, Chief U.S. Economist at BNP Paribas, said, "Powell seems to lack urgency in taking action on potential inflation trends, and he seems to believe the risk of making a wrong assessment is high."
Iran Conflict
Powell will almost certainly be asked about the potential economic impacts of Middle East events. Last weekend, the U.S. directly joined the conflict by bombing Iran's nuclear facilities. Trump announced a ceasefire between Iran and Israel, causing oil prices to plummet to levels before Israel's attack on Iran.
At last week's press conference, Powell was reserved in his comments about the conflict and potential impacts. "Of course, we are watching developments like everyone else," he said. "We may see higher energy prices. Historically, when there is turmoil in the Middle East, you might see energy prices spike, but they often fall back. These events typically do not have a lasting impact on inflation."
Political Pressure
Republican lawmakers are expected to pressure Powell to provide clear reasons for his wait-and-see approach, though some will likely take a less aggressive approach.
"Chairman Powell deserves praise for successfully navigating some of the most challenging periods in modern history," wrote Dan Meuser from Pennsylvania, a House Financial Services Committee member, on social media last weekend. "But with inflation cooling and the labor market strong, the benefits of rate cuts are becoming hard to ignore."
But if other lawmakers follow Trump's lead, Powell may face more intense fire. Trump's recent attacks have focused on the cost of interest rates to the federal government. He has become increasingly personal, calling the Fed chairman "one of the most stupid and destructive people in government".
According to the Fed, when Powell met with Trump in May, he told the president that the Federal Open Market Committee's decisions are based on "careful, objective, and non-political analysis". He is expected to demonstrate more of this resolute attitude.
"He will remain completely calm and composed," predicted Mark Gertler, an economics professor at New York University.
Powell may also hear encouraging words from Democrats, who might warn that the Fed's independence is being threatened by Republicans.
Bank Regulation
Fed watchers will also have an opportunity to gauge Powell's views on ongoing key regulatory reforms. The White House is pursuing a deregulation agenda, with several federal agencies working to loosen rules. As part of this, Trump nominated Bowman to the Fed's vice chair for supervision position.
On Monday, Bowman said it's time to re-examine a key capital buffer that some regulators and bankers believe limits bank trading in the $29 trillion Treasury market. According to Bloomberg, the Fed and other regulators will propose lowering the so-called "enhanced Supplementary Leverage Ratio" (eSLR), a rule introduced in 2008 that forced banks to hold a certain amount of capital relative to their assets.
Powell may also have to answer questions about Texas Republican Senator Ted Cruz's recent proposal to ban the Fed from paying interest on bank reserves. Cruz claims this would save $1.1 trillion over ten years, but some analysts believe it would jeopardize the Fed's ability to control short-term interest rates.
Senate Banking Committee Chairman Tim Scott blocked adding this proposal to the Trump tax and spending package still under congressional review but did not completely reject the idea.
Paying interest on bank reserves actually prevents banks from lending at rates lower than the Fed expects, setting a lower limit for the overnight market.
