Chairman Powell of the Federal Reserve will face pressure from lawmakers this week who urgently want the Fed to cut interest rates. Many lawmakers are also unhappy with his plan to raise capital requirements for Wall Street banks.

On Tuesday and Wednesday of this week, Powell will go to Capitol Hill to testify to the Monetary Policy Committee. This hearing will be Powell's last public speech before the US presidential election, and he may have to defend the Fed's stance of sticking to tight monetary policy and claiming independence from politics.

Fed officials lowered their estimate of how many times interest rates will be cut this year in June, indicating that they will keep rates at their highest level in 20 years and wait for more evidence that inflation is approaching its 2% target. Powell reiterated this message in his comment last week and refused to specify when he will start cutting rates.

Recent data shows that after the volatility at the beginning of the year, the Fed's preferred inflation indicator slowed down in May. Market expects that the CPI data, another inflation indicator that will be released on Thursday, will show the smallest consecutive two-month increase in core CPI since August last year.

However, the labor market is also cooling, and some Fed officials are starting to warn of further slowing down. Although non-farm payrolls in June are still strong, they are mainly concentrated in healthcare and government departments, and previous months have been revised to lower levels. Unemployment rate rose to 4.1%, the highest since the end of 2021.

Call for rate cuts

As Powell faces questioning, the issue of interest rate cuts is bound to be a top priority. Democrats who demand rate cuts have long argued that high rates are hurting consumers hit by high prices. Inflation is still a focus of voters' attention, and the issue of whether and when to cut interest rates is becoming a hot issue before the November presidential election.

At Tuesday's Senate Banking Committee hearing, Senator Elizabeth Warren may force Powell to cut interest rates, especially after she and Democratic colleagues sent another letter to Powell last month urging the Fed to ease monetary policy like the European Central Bank.

Other Democrats are cautiously avoiding being accused of interfering with the Fed's independence. There are reports that former President Trump may try to limit the Fed's power after his reelection.

Before attending the House Financial Services Committee hearing on Wednesday, Representative Jim Himes said no member of Congress should pressure the Fed to raise or lower interest rates."One of the cornerstones of our stable economy is our independent monetary policy, and if politics are going to interfere with that monetary policy, we will quickly not have a stable economy."

Others say the call for rate cuts is more based on an assessment of the economy than politics.

Representative Brendan Boyle said, "Our argument is based on the data and what it shows. Although the overall economy is strong, I am more concerned about the problem of economic slowdown than the concern that inflation has not fully reached 2%."

He also expressed concern about mortgage rates, which are almost double the level before the epidemic, making homes unaffordable and preventing people who want to move from selling their homes. This is consistent with the views of some economists who believe that the Fed is unnecessarily limiting economic growth.

The chief economist of Moody's Analytics, Mark Zandi, said, "We are very close to our target for inflation, and all the trends look good." He called on the Fed to start cutting rates immediately, partly because part of the reason for inflation exceeding 2% is due to subsequent rental sub-items.

Zandi said that as the election approaches, the issue of rate cuts may become increasingly complex. "Even if decision-makers really don't want to be influenced by today's politics, they are almost certain to be influenced."

Bank capital requirements

Besides the issue of rate cuts, Powell may also face the sharp issue of US plans to force Wall Street banks to increase significantly more capital. In March this year, the Fed chairman said that he expected proposals from US regulatory agencies to make "broad and substantive changes" that might require the eight largest US banks to hold about 19% more capital as a buffer against financial shocks.

Republicans, including Patrick McLoughlin, chairman of the House Financial Services Committee, criticized the Fed's initial plan. McLoughlin and other Republican lawmakers urged regulators to withdraw the proposal last September, saying it had "fatal flaws" and could pose a risk to the financial system.

Powell did not indicate whether the Fed, the Federal Deposit Insurance Corporation, and the National Bank Supervision Committee will scrap the original proposal. However, Fed officials recently showed other US regulatory agencies a three-page document outlining possible modified plans that would significantly reduce the burden on large banks.

Recently, Elizabeth Warren accused Powell of giving bank executives too much influence over proposals, which may foreshadow other things that may happen on Tuesday. Powell insisted that the Fed does not consider political factors when formulating policies.