Powell's first day of Congressional hearings: there is also a possibility of an early interest rate cut, and it cannot be ruled out that tariffs have a lower-than-expected impact on inflation.

On the first day of a special congressional hearing on Federal Reserve monetary policy, Chairman Powell indicated that the Federal Reserve has paused rate cuts due to the expectation that tariffs would drive up inflation. However, he does not rule out the possibility that the impact of tariffs on inflation might not be as significant as anticipated, nor does he dismiss the likelihood of an earlier rate cut.

On Tuesday, June 24, Eastern Time, during the question-and-answer session of the House Financial Services Committee hearing, a member asked about the possibility of a rate cut in July, mentioned by Federal Reserve Governor Waller last Friday. Powell responded, "There are many possible paths." He noted that inflation might not be as strong as expected, and a decline in inflation along with a weak labor market could mean an earlier rate cut by the Federal Reserve.

Subsequently, Powell stated that data indicates that at least certain industries' tariffs will impact US consumers. He said, "We believe we should start to see" the impact of tariffs on inflation in the June and July data. "If not, we will learn from it."

Powell expressed a "completely open" attitude toward the view that the impact of tariffs on inflation will be lower. If the influence of tariffs on consumer prices is less than the Federal Reserve's expectations, it will have substantial implications for the Federal Reserve's monetary policy.

After mentioning the possibility of an earlier rate cut and suggesting that if the impact of tariffs on inflation is lower than expected, it would promote a rate cut, US Treasury yields continued to decline, hitting a daily low. The benchmark 10-year US Treasury yield briefly fell below 4.30%, while the more interest rate-sensitive two-year Treasury yield approached below 3.81%, with both dropping over 5 basis points during the day. Commentators believe that Powell did not rule out the possibility of a rate cut in July during this hearing and also did not exclude that inflation might weaken.

“新美联储通讯社”：鲍威尔不排除7月降息可能 但暗示更有可能至少等到9月

有“新美联储通讯社”之称的记者Nick Timiraos发文指出，鲍威尔此次听证会告诉议员，如果不是担心提高关税可能会破坏美联储多年来对抗通胀的努力，近期的经济数据很可能证明继续降息是合理的。鲍威尔认为，经纪活动稳健，因此联储官员可以仔细研究数据，判断是否重启降息。

The article states:

"Powell did not explicitly rule out the possibility of a rate cut next month (July), but did not provide specific details. However, in response to questions from lawmakers, he hinted that Federal Reserve officials are more likely to wait until at least the September meeting to see if tariff-driven price increases are lower than expected before resuming rate cuts."

The article quoted Powell as saying:

"If it turns out that inflationary pressures are indeed under control, we will cut rates as soon as possible, rather than later, but I don't want to point to a specific meeting."

The decision not to cut rates is based on predictions that inflation will rise this year, coupled with the uncertainty brought by tariffs.

At the hearing, a member asked about the changes in predictions from Federal Open Market Committee (FOMC) members since March this year. Powell stated that their changes in inflation expectations are primarily sourced from tariffs.

Powell stated that the vast majority of FOMC members believe that it is appropriate to cut interest rates later this year, but he pointed out that the economic outlook is "very uncertain."

Some legislators mentioned the impact of tariffs from the Trump administration and asked if the Federal Reserve officials had considered this in their assumptions. Powell said they were attempting to disclose their assumptions in speeches but would not comment on policy. Even if it is not explicitly stated in a quarterly updated economic outlook, officials do discuss their assumptions in their remarks.

Some legislators asked why the Federal Reserve cannot cut interest rates like other central banks in other countries. Powell replied that all professional forecasters outside of the Federal Reserve expect inflation to rise in the U.S. this year, which is why the Fed has not taken action yet.

Subsequently, some legislators criticized that the Federal Reserve raised rates too late during Biden's presidency and lowered rates too late after Trump took office. In response, Powell directly attributed the Fed's failure to cut rates to the uncertainty brought about by tariffs.

Powell then mentioned that uncertainty factors are part of the reason for the Federal Reserve's pause in lowering interest rates. Uncertainty has declined after peaking in April. He stated that the business community "feels more optimistic" now.

In the prepared testimony released before the hearing began, Powell noted that short-term inflation expectations have risen in recent months, with tariffs being a key driving factor, while most long-term inflation expectations indicators remain consistent with the Federal Reserve's 2% inflation target. The impact of tariffs on inflation could be temporary, but it might also be more lasting, depending on the effect of the tariffs.

In the long run, interest rate policy does not affect the supply and demand of the Real Estate market; interest rates are at a moderately restrictive level.

Some legislators asked if the Federal Reserve's policy has restricted housing supply. Powell replied that the Fed cannot influence the longer-term issue of housing supply shortages in the U.S. Long-term housing shortages do exist, and the Fed is powerless to change that. What the Federal Reserve can best do is lower inflation, which in turn will lead to lower interest rates in the relevant markets.

Powell pointed out that interest rate-sensitive Industries like Real Estate are indeed affected by Federal Reserve policy, but "this is part of restoring overall price stability mechanisms." In the long run, the Fed's policy will not affect supply and demand in housing.

Powell stated that the inflation related to housing costs has been quite "sticky," but it has recently declined, which is "very good news." The inflation related to housing rentals is now decreasing rather regularly.

Powell believes that reducing housing inflation "just takes time." The impact of rent decreases may take three to four years to reflect in the price Indicators.

Some lawmakers later mentioned issues in the Real Estate market, stating that many homeowners seem to be "in a bind" because they bought when interest rates were low a few years ago and are unwilling to sell their homes. Powell indicated that indeed, "people are trapped." However, Powell reiterated that the Federal Reserve's primary responsibility is to continuously reduce the inflation rate to 2% and maintain it at this level over the long term.

Powell stated that the current interest rates are at a modestly restrictive level, rather than a moderately restrictive level.

The interest rate cut last September was due to concerns over a significant rise in the unemployment rate, and decisions would not consider political factors.

A lawmaker asked about the debt issues arising from the Trump administration's large tax cuts and spending plans, and whether it would weaken the US's ability to respond to future economic downturns. Powell said that in such a scenario, the Federal Reserve would have a lot of room to cut interest rates.

Subsequently, Powell reiterated his view that the US federal budget has been on an unsustainable trajectory for "some time now."

A lawmaker asked why the Federal Reserve cut interest rates by 50 basis points last September, rather than 25 basis points. Powell stated that at that time, the Federal Reserve was concerned about a significant rise in the unemployment rate. Historical experience indicates that a substantial increase in the unemployment rate is often associated with a higher risk of economic recession.

Powell said that the decision at that time was "related to the labor market" and not political. Powell pointed out that the Federal Reserve had been criticized for the slow action of monetary easing.

Powell told lawmakers that the Federal Reserve does not consider political factors when deciding on interest rates.

There are no signs of weakness in the labor market; the strong economy allows for a pause in rate cuts.

A lawmaker asked how today's indicators are similar to those from September last year, yet the Federal Reserve has not cut rates. Powell again pointed out that there is a general expectation that tariffs will increase inflation. He also stated that there are currently no signs of weakness in the labor market. Given the strong economy, there is no rush to cut rates. "As long as the economy is strong, we can afford to pause a bit on the rate cuts."

When discussing the absence of rate cuts, Powell stated that the Federal Reserve is simply trying to remain careful and cautious regarding the inflation issue. He said, "This is just a matter of being careful and prudent."

Powell reiterated that if the labor market weakens, the Fed will act more quickly. He said that if inflation is kept in check, the Federal Reserve can afford to cut rates sooner rather than later. He does not want to imply that the Fed will decide to cut rates at any specific FOMC meeting.

If the labor market is strong and inflation rises, interest rate cuts will come later, not earlier.

A congressman asked why the Federal Reserve's current interest rate setting contradicts the so-called 'first-difference' rule. According to this rule, the Federal Reserve would adjust the benchmark interest rate based on changes in recent inflation and growth forecasts.

Powell noted that the first-difference rule currently indicates that the Federal Reserve should raise interest rates. This rule 'might be a bit volatile.' Other rules suggest that interest rates are close to the Federal Reserve's current levels. He said that if the labor market remains strong and inflation rises, 'I believe we will still take measures to cut interest rates, but it will be later rather than sooner.'

At least part of the tariffs will be borne by consumers, and price stability has not yet been fully restored.

A lawmaker asked about the possible lagging effect of tariffs on inflation. Powell stated that retailers usually mention the existence of a lag. The Fed just does not yet know how much of the tariff impact will be passed on to consumers.

A congressman asked whether consumers would bear the tariff costs. Powell stated that initially, it would be the importers who bear the costs. However, over time, five different participants would share the burden: manufacturers, exporters, retailers, and consumers. He indicated that data shows at least part of the tariffs will ultimately be borne by consumers.

When asked about the impact of tariffs on small businesses, Powell noted that small businesses typically import a single product, and these companies are affected more than others.

Powell said the Federal Reserve has 'not yet fully restored price stability.' The Fed needs to act cautiously to prevent a resurgence of inflation shocks.

Commenting on tariff policy is not the responsibility of the Federal Reserve.

A congressman urged Powell to comment on whether he believes Trump's tariff policy is 'coherent.' Powell repeatedly declined to comment.

A congressman complained that the tariff policy is hurting the business community and demanded Powell to 'give me an answer' regarding the tariff policy, asking 'why are you avoiding the tariff struggle,' and also questioned 'are you afraid of Trump, and why are you not addressing this issue.'

Powell responded: 'To be honest, this is not our (Federal Reserve's) responsibility at all. We are not an institution that comments on or analyzes decisions made by the president.'

This year, the economy is expected to slow down, and immigration is one of the reasons; AI may potentially replace a large number of jobs.

A congressman mentioned the Trump administration's policy of expelling illegal immigrants, believing that this policy has caused "collateral damage" in sectors that urgently need workers, especially in agriculture, and asked what impact this policy has on the economy.

Powell responded that immigration is also an area not under the Federal Reserve's responsibility. He said that the Fed is "going with the flow" regarding changes in immigration policy, and that policy shifts have reduced labor growth while the demand for workers is also declining.

Powell expects that U.S. economic growth will slow this year, and immigration issues are one reason for that.

Powell stated that economists in the labor field indeed believe that the domestic-born population in the U.S. is "very likely" to fail to meet labor demand in the coming years. Productivity may improve, thereby reducing the demand for workers, but "I wouldn't count on that."

Powell mentioned that he does not expect artificial intelligence (AI) technology to bring widespread productivity benefits. He believes that AI may take longer to promote productivity growth, or that AI's impact is not as significant as people imagine. He said there is definitely a possibility that "AI will replace a large number of jobs."

When asked about the impact of AI, Powell pointed out that economists are analyzing its effects extensively. Currently, its impact is 'still unknown.' He has heard some CEOs of companies say that there could be significant layoffs due to AI, 'but I believe we are not informed about this.'

The U.S. oil industry places more emphasis on investment returns, and the view that a spike in oil prices will lead to increased production as a "shock absorber" is being questioned.

A congressman asked about the risks of global energy price fluctuations, stating that oil prices could rise to $120 per barrel.

Powell said, "We will definitely feel this."

Powell stated that people's thoughts on the concept of US Energy independence are evolving. A few years ago, there was a view that if energy prices surged, the US would have a 'natural buffer' because the domestic energy industry would 'only increase production.' This would prevent sustained oil price shocks like those in the 1970s.

Then Powell said, 'Now, that (view) is actually being questioned.' He emphasized that after suffering a blow from over-investment, the US energy industry is 'more cautious and focuses more on investment returns.' He referred to the oil industry downturn in the mid-2010s.

Powell stated that if oil prices surge, the Federal Reserve would pay attention to overall inflation trends.

As long as they meet the criteria of "safety and soundness", Banks can freely engage in Cryptos activities.

One of the Republican leaders in Cryptos legislation, Congressman Bryan Steil, asked about the Federal Reserve's decision to eliminate reputational risks in bank regulation.

Powell stated that the Fed recognizes that de-banking is a real issue that needs to be addressed. As long as it adheres to its own principles of 'safety and soundness', banks can freely provide services to crypto companies and engage in activities related to Cryptos.

Powell indicated that there has been a significant change in people's 'attitudes' towards Cryptos and anticipated more activity in the sector. He mentioned that the legislative process regarding the stablecoin framework draft in Congress is progressing well.

Powell stated that the Federal Reserve has no power to buy Bitcoin and does not seek Congress's legal authority to do so.

The US dollar remains the number one safe-haven currency. The fluctuations in US Treasury bonds in April have not affected the notion of a dollar decline, which is considered premature and exaggerated.

When asked about the dollar's status as a safe haven and the overseas demand for US Treasury Bonds, Powell stated that the dollar's safe haven status remains unchanged, and it is still the number one safe haven currency.

He warned against carelessly claiming that the dollar's safe-haven status has changed, stating, "We need to be cautious about these sudden emerging narratives."

Regarding the dollar's role as a reserve currency, Powell stated that the Federal Reserve's responsibility is to maintain price stability in the long term. He mentioned that the rule of law, price stability, and open capital markets are key to the dollar becoming the world's reserve currency.

A congressman asked whether it is believed that the fluctuations in the US Treasury bond market in April did not undermine the dollar's global position. Powell concurred, stating that it did not undermine the dollar's global position.

Powell said that maintaining the dollar's dominance "is not officially our responsibility," although it is a concern for the Federal Reserve. "We certainly do not want to undermine that." He noted that the Treasury plays a major role in dollar issues.

Some lawmakers claimed that the dollar declined during Trump's administration and asked if we are currently in a period of dollar decline. Powell replied, "I wouldn't say that," "The dollar is still the number one safe-haven currency. I think these claims about a dollar downturn are premature and a bit exaggerated."

Relaxing the SLR would encourage banks to participate in Treasury Trade.

A legislator asked about the key Indicator for banking regulation, the Supplementary Leverage Ratio (SLR). Currently, the focus on relaxing financial industry regulations is centered on easing SLR regulatory rules.

Powell stated that when the SLR is binding, it does indeed hinder banks from participating in activities like Treasury Trade. He mentioned that relaxing this measure should encourage more banks to participate. However, Powell did not provide numerical estimates for the extent of this impact.

When faced with the SLR issue again, Powell said, "I have always believed that if we have a leverage ratio as a backstop, rather than a binding constraint, it would be better," as the latter would weaken banks' willingness to hold US Treasuries.

The CRE situation is improving, and private credit is worth close attention.

A legislator asked about issues related to banking regulation. Powell responded that Federal Reserve Vice Chairman Barr is pushing for more reforms under financial regulation.

A legislator inquired about the sequencing of changes to bank capital requirements. Powell indicated that this would be decided by Barr.

When discussing the risks to financial stability, Powell stated, "There are many risks that need attention to prevent them from getting out of control." He pointed out that one of these is commercial real estate (CRE).

Powell speculated that in the current environment, banks may "avoid risk." Asset prices are currently high, but the leverage ratios of banks, households, and businesses are not that high.

Powell mentioned that the CRE issue has existed for five years, and the Federal Reserve is working to address this problem, making good progress with the situation improving and not deteriorating.

Powell believes that overall, there is no need to worry about financial stability. The private credit market has been growing rapidly and has not yet experienced a "real recession," so this area deserves close attention from regulators. The credit conditions facing small businesses are slightly tighter.

Trump threatened that the Federal Reserve's functions would have no effect; not maintaining independence could damage the Fed's credibility in controlling inflation.

A congressman asked whether there are concerns that the Trump administration's cuts to the budget and staff of the US Bureau of Labor Statistics would affect economic statistical data. Powell stated that there has been some "setback" in this regard, and understanding the economic situation is "very important." He also mentioned that investing in data is a good investment.

A congressman asked how Trump's threats affect the Fed's personnel in performing their government duties. Powell said, "These threats have no effect. We are fulfilling our responsibilities."

A congressman asked whether the president of the United States can appoint himself as the chair of the Federal Reserve. This question was evidently in response to Trump jokingly saying last week, during his public criticism of the Fed for not lowering interest rates, "Can I appoint myself as the chair of the Federal Reserve? I would do much better than these people."

Regarding the above question, Powell stated, "I don’t know"; this "is not my question. I will not speculate."

A congressman emphasized that the independence of the Fed is very important and asked Powell what his biggest concern would be if his successor, the next Federal Reserve chair, cannot maintain this independence.

Powell stated that the credibility of the Fed in terms of price stability is crucial. If this credibility is lost, long-term interest rates will rise, and maintaining this credibility will come at a "high cost."

Powell revealed that he privately heard some congressmen say that the Fed's decision to keep interest rates unchanged is the right approach.

Powell stated that if the Federal Reserve steps into areas outside its responsibilities, its independence would face significant risks. "I agree that climate issues are one of the biggest risks."

Powell acknowledged that climate issues are an important topic that government officials should consider, but pointed out that in the past, the Federal Reserve has not played any role in climate policy. He stated that the Federal Reserve is considering revoking previous regulatory guidance regarding banks' consideration of climate risks.

A member of Congress mentioned a proposal put forward by the Republicans that sets the Federal Reserve's salary cap at 70% of the salaries of non-monetary sector employees of the Federal Deposit Insurance Corporation (FDIC). Powell stated that such a proposal would make it more difficult to attract and retain employees and would break the "moat" that has allowed the Federal Reserve to manage its affairs independently for 90 years. He said that salary cuts would complicate the Federal Reserve's ability to control its workforce size.

At the current pace, the reduction in the balance sheet can be maintained for a considerable time.

Regarding the reduction of the balance sheet, Powell stated that the Federal Reserve is on track with the balance sheet reduction. The Federal Reserve still has room to reduce the balance sheet and can maintain this pace for "quite some time."

Powell said, "We still have some work to do regarding the balance sheet reduction," but he believes that the size of the Federal Reserve's balance sheet will not fall back to $4 trillion.

Comments pointed out that due to super accommodation, the size of the Federal Reserve's balance sheet peaked at $9 trillion in 2022, and the current size is $6.7 trillion, higher than about $4.2 trillion before the COVID-19 pandemic.

Powell stated that the Federal Reserve hopes to maintain a sufficient reserve framework to ensure adequate liquidity.

A lawmaker asked about the impact of balance sheet reduction on the market regarding mortgage-backed securities (MBS). Powell believes the impact is minimal.

If the issue of unsustainable debt growth is delayed for too long, the consequences will be more severe.

Powell reiterated his view at the hearing that for some time, the US federal government's budget and debt growth have been on an unsustainable path. He did not comment further on fiscal policy.

Subsequently, a member of Congress asked where the critical point is for US debt to reach a point of no return. Powell stated that there are currently no conclusions. Commentators noted that US Treasury Secretary Bessent had previously expressed the same opinion. Last month, he stated during a House hearing that it is difficult to predict when the market will 'rebel.'

A member of Congress asked about the impact of unsustainable US debt on the economy.

Powell stated that this will lead to rising long-term interest rates, and Congress will ultimately have to take action to control the deficit. 'If we wait too long on the issue of dealing with the debt, the consequences will be even more severe.'

Do not speculate on the economic impact of the conflict with Iran; there are sufficient resources to prepare for cyber threats related to Iran.

Powell said he does not want to speculate on the economic impact of the conflict between Israel and Iran.

A lawmaker asked about the potential threat of Iranian cybersecurity to the American Financial system. Powell stated that the Federal Reserve is urging banks to remain vigilant and that the Fed itself is also staying alert. "In the field of cybersecurity, you can never rest on your laurels."

Powell mentioned that the Federal Reserve believes it has adequate resources to prepare for cybersecurity threats.

A lawmaker inquired about President Trump’s criticism of Powell. He focuses on serving the public. "Do what you think is right and accept the consequences."

Powell told lawmakers that focusing on anything outside of the economy would be a distraction. "What I care about is serving the American people."

Editor/joryn