Powell Testimony Preview: What to Expect Ahead of the Hearing

Is the Federal Reserve considering cutting U.S. interest rates as soon as July? That's the big question on Wall Street as Fed Chair Jerome Powell prepares to testify before Congress this week.

Despite the Fed's unanimous decision last Wednesday to leave borrowing costs unchanged, Powell didn’t hint at a possible rate cut in July. The Fed has expressed concerns about rising inflation tied to tariffs. However, two top Fed officials have since suggested they could support a rate cut next month if inflation remains steady.

The Shift in the Fed's Stance

Federal Reserve Governors Chris Waller and Michelle Bowman, both appointed by President Trump, have said they would consider supporting a rate cut in July, provided inflation stays near current levels. For months, President Trump has been pushing for a rate cut, and these two officials seem to be more aligned with his views.

Waller and Bowman argue that the high tariffs implemented during Trump’s presidency are unlikely to have much impact on inflation. They also worry that if the Fed waits too long, the U.S. job market could suffer, potentially pushing up unemployment.

Bowman recently said in a speech, "Should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting to bring it closer to its neutral setting and to sustain a healthy labor market."

Market Expectations for a Rate Cut

For now, most Wall Street futures markets are forecasting the first rate cut of 2025 will occur in September. Only 23% of investors are betting on a July rate cut.

Powell has been more cautious, signaling that he wants to wait and see how tariffs affect inflation and the broader U.S. economy. The Fed will receive one more key inflation report before its July 29-30 meeting, which could give them more clarity.

Powell is expected to be asked about a potential July rate cut when he testifies before Congress this week. However, most analysts don’t expect his message to change.

Oxford Economics noted, "We believe that most members of the committee seem to be aligned with Powell, who prefers to take a 'wait and see' approach. But it wouldn't take much for some to shift towards Waller’s view."

The Impact of Inflation and Tariffs

The Fed uses the personal consumption expenditures (PCE) index to measure inflation, and it's expected that the PCE inflation rate will come in at 2.3% for the 12 months ending in June—just slightly above the Fed's 2% target.

Despite U.S. tariffs being at their highest in decades, many businesses haven’t raised prices significantly, even as their costs have gone up. Waller explained that tariffs only affect a small part of the economy, especially when it comes to imported goods.

Additionally, the softening labor market means workers have less leverage to demand higher wages. Waller pointed out, "If workers try to ask for more pay, their employer is going to show them the door."

Businesses and Consumers: How Tariffs Affect Prices

Bowman added that businesses are hesitant to raise prices because consumers are already highly price-sensitive after four years of high inflation. Most shoppers have become more cautious about spending.

All three Fed officials—Powell, Waller, and Bowman—agree that the burden of tariffs will be shared by importers, exporters, and consumers in varying degrees. This approach is expected to ease the economic pain and likely result in only a short-term spike in inflation, which should fade over time.

Waller concluded, "We already know that the tariffs aren’t being fully passed through to consumers. Everyone has to bear a little bit of the pain from the tariffs."

My Take on the Situation

From my perspective, the Fed's decision to cut rates will ultimately depend on the continued performance of inflation and the labor market. While Waller and Bowman are open to the idea of a rate cut, Powell’s cautious stance reflects concerns about the potential risks of an overly aggressive move.

The current economic environment, with tariffs having a relatively modest effect on inflation, may reduce the urgency for a rate cut. However, if the Fed waits too long, it could risk an adverse impact on the job market, and that’s a balancing act the central bank will need to navigate carefully.

Ultimately, whether the Fed cuts rates in July remains uncertain. The market's expectations and the Fed's internal debates will likely play a significant role in shaping the economic outlook in the coming months. For investors, keeping an eye on inflation data and the Fed's signals will be crucial to understanding the future direction of monetary policy.