Regarding the July FOMC meeting, Powell refused to make predictions, stating that the future economic outlook will determine the direction of policy.

Written by: He Hao, Bu Shuqing, Wall Street Insights

On Tuesday local time, Federal Reserve Chairman Powell spoke at a conference hosted by the European Central Bank in Portugal, alongside central bank leaders from Europe and Asia.

Powell stated that stable economic activity gives the Fed time to study the impact of tariff increases on prices and economic growth before resuming rate cuts. He kept multiple options open. Powell reiterated his previous stance on Tuesday:

"We are just taking a wait-and-see approach. As long as the U.S. economy remains robust, we believe the prudent course is to wait, gather more information, and observe what these impacts might be."
A clear majority of Fed officials expect rate cuts later this year.

In recent weeks, due to U.S. inflation data for April and May falling below some economists' expectations, investors have raised their expectations for the Fed to cut rates in the second half of this year.

Powell indicated that if it weren't for concerns that tariffs might undermine the final stages of the Fed's efforts to suppress inflation in recent years, the Fed would likely continue to gradually cut rates this year. When asked if the Fed would have cut rates again now if Trump had not announced his controversial plan to impose tariffs on many foreign trading partners earlier this year, Powell responded:

"I think so. In fact, when we saw the scale of the tariffs and that nearly all inflation forecasts for the U.S. had risen significantly due to the tariffs, we paused on rate cuts."

Regarding the upcoming July FOMC meeting at the end of this month, Powell refused to make predictions, stating that the future economic outlook will determine the direction of policy. "I won't rule out any meeting, nor will I explicitly place it on the agenda."

About Inflation and the Labor Market

After a significant decline over the past two years, a key core inflation indicator is currently stable at slightly above the Fed's 2% target. According to the Fed's preferred measure, core inflation excluding food and energy was 2.7% in May.

Fed officials generally expect tariffs to push prices higher this summer. Powell stated that Fed officials will closely monitor whether inflation manifests or not. "Inflation is performing as we expected and hoped. We anticipate that summer inflation data will rise."

Powell reiterated that the impact of tariffs is expected to show up in inflation data over the next few months, but he also acknowledged that uncertainties remain. "We are watching and expect to see some higher numbers this summer." He added that the impact of tariffs could be higher or lower than expected, and the timing could be earlier or later than anticipated, with policymakers mentally prepared for these scenarios.

Despite Trump's strong pressure for rate cuts, the Fed has not cut rates so far this year, partly to observe whether the price increases triggered by tariffs will evolve into more persistent inflation. However, so far, prices have not risen significantly due to inflation. Powell said, "We have always said that there is a high degree of uncertainty regarding the timing, magnitude, and duration of inflation."

When discussing the labor market, he said, "We expect the labor market to gradually cool. We are closely monitoring any signs of unexpected weakness."

Last week, while testifying before Congress, Powell hinted that Fed officials are more likely to wait until at least after the September meeting to assess the extent of price increases driven by tariffs.

"New Federal Reserve News Agency" Commentary

Nick Timiraos, a well-known financial journalist referred to as the "New Federal Reserve News Agency," commented:

Powell's recent remarks, including those made during Tuesday's discussion, indicate that he is striving to maintain broad flexibility in policy over the coming months. This suggests that the Fed's rate-cutting strategy may shift—especially if the final tariff increases are lower than the levels announced by Trump in April.
In the past, the Fed might have needed clear signs of economic deterioration to cut rates, but now Powell suggests that in the current environment, weak summer employment data and lower-than-expected price increases might be enough to prompt a rate cut.

Timiraos cited some analysts' views that the Fed might resume rate cuts for another reason: they believe tariffs are more likely to compress corporate profits, weaken economic activity, and raise unemployment rather than trigger persistent and meaningful inflation.

Timiraos pointed out that consumer spending data this year has shown signs of slowing, particularly in discretionary spending areas like travel.

Divisions Within the Fed

The Fed unanimously voted to keep rates unchanged at the June meeting, but the latest dot plot shows divisions among officials regarding the future path of rates. Ten decision-makers expect at least two rate cuts this year, while seven officials predict no cuts in 2025, and two expect only one cut before the end of this year.

As previously reported, there is a "historic-level split" within the Fed regarding the monetary policy path. Bowman and Waller support a rate cut as early as July, believing that the price increases triggered by tariffs are one-time events; however, hawkish Harker disagrees, and Powell emphasizes the need to observe summer data. Some officials are concerned that Trump's significant increase in import tariffs this spring could reignite inflationary pressures, especially after high inflation in recent years has made businesses more adept at raising prices.

The market expects the Fed to cut rates by 70 basis points this year, with Citigroup still forecasting the first cut in September but acknowledging an increased possibility in July.

Pressure from the Trump Administration

Powell's remarks came after he faced rare public criticism from Trump and his senior advisors, who accused Powell of having partisan leanings—an accusation Powell firmly denied. The Fed cut rates by 1 percentage point last year, while Trump has called for cuts of up to 3 percentage points.

Republicans in Congress are pushing for tax cut legislation, and some analysts believe this will exacerbate the fiscal deficit in the coming years. Previously, the U.S. government's efficiency office attempted to cut spending but fell far short of expectations, highlighting the difficulty of reducing the deficit.

In a letter to Powell released by the White House on Monday, Trump reiterated his desire to lower interest rates, arguing that it would reduce U.S. interest expenses. However, this reasoning lacks persuasiveness in the eyes of the Fed, as Congress has authorized it to maintain low inflation and strong employment—conditions that many economists believe are the foundation for ultimately achieving lower borrowing costs.

U.S. Treasury Secretary Basant recently stated in a television interview that the Fed seems to still be "traumatized" by the high inflation experienced in 2021-2022. He compared the Fed to an elderly person who has fallen before, suggesting that the fear of falling again leads them to look down at the ground, making it more likely they will fall again.

Although Powell's term as Fed Chair will last until May next year, Basant has also indicated that the White House may nominate a successor as early as October or November to fill the board seat that will become vacant in February next year.

On Tuesday, Powell deliberately avoided responding to the White House's ongoing criticism of his intelligence and integrity.

At a welcome dinner for central bank meetings on Monday, Powell received a standing ovation from attendees after European Central Bank President Lagarde described him as "the standard of a brave central banker."

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