Will Powell shift stance on rates amid Trump attacks, Israel-Iran conflict?
Corrections & Clarifications: This story was updated to reflect that former President Joe Biden dropped out of the 2024 election race by the time the Fed began its rate cutting campaign.
Despite intensifying political pressure and potentially reduced risks of an oil price spike following Monday’s now-wobbly Israel-Iran ceasefire, Federal Reserve Chair Jerome Powell is standing by the central bank’s wait-and-see approach to interest rate cuts.
Powell repeated Tuesday that the Fed plans to assess the effects of President Donald Trump’s tariffs on inflation before lowering rates, brushing off mounting pressure from both Trump, his own Fed colleagues, and Republican lawmakers.
“For the time being, we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance,” Powell told the House Financial Services Committee.
He added “tariffs this year are likely to push up prices and weigh on economic activity,” noting it’s not clear if the effects will reflect a “one-time shift in the price level” or something “more persistent.”
“The (Fed’s) obligation is to keep longer-term inflation expectations well anchored and to prevent a one-time increase in the price level from becoming an ongoing inflation problem,” he said.
Powell’s remarks suggest that, at least in the short term, officials aim to stand pat on rates as they prioritize their mission to head off a potential inflation surge – in this case due to tariffs - over cutting rates to stimulate a weakening economy or possibly even a recession.
In a jarring turnabout, Powell faced sharp questions from Republican lawmakers backing Trump's demands for rate cuts while Democrats generally supported the Fed's decision to hold off until the effects of tariffs on prices become clearer.
Traditionally, Democrats have favored earlier rate decreases to aid U.S households struggling with high borrowing costs while Republicans have sought to keep rates higher to prevent inflation surges.
Noting that inflation has continued to drift down close to the Fed's 2% goal, Rep. Bill Huizenga, R-Michigan, asked, "Why aren't you doing what the rest of the world is doing" and lowering rates? "Why?"
Powell agreed inflation has eased, adding, "If you just look in the rear view mirror, you could make a good argument" that the Fed should be trimming its key rate.
"The reason we're not is that forecasters do expect a meaningful increase in inflation (from tariffs) in the course of the year," he said.
Powell later added, "We would expect to see meaningful effects in June, July August. And if we don't we will have learned something." And that could prompt officials to chop rates sooner than they anticipate, he said.
Rep. Mike Lawler, R-New York, said that even if inflation does surge because of tariffs or a leap in oil prices, both shocks should lead to just a one-time inflation rise that quickly dissipates.
"What is the reason not to cut rates?" Lawler asked.
"It's the uncertainty about the size and potential persistence" of the uncertainty and price increases "from tariffs," Powell said.
Some of the exchanges were tinged with politics.
Rep. Scott Fitzgerald, R-Wisconsin, noted the Fed lowered rates by an outsize half a percentage point last September when the economy broadly resembled current conditions in the midst of the 2024 presidential election. Fitzgerald said he wasn't suggesting the Fed's rate current hesitancy to cut rates was based on political factors.
Powell said officials supported a large rate cut then because the unemployment rate had risen by a half percentage point over the previous year, based on a three-month average, a rise that has consistently foreshadowed recession. "There was a lot of concern," he said.
On the Fed's current cautious approach, he added, "We're saying let's just wait and see more. It's just a question of being prudent and careful at a time the labor market is still strong."
Democrats, meanwhile, largely defended the Fed's wary approach.
"You did not bow to pressure from Trump," Rep. Maxine Waters told Powell.
How is the economy in the US right now?
Powell said the economy “is in a solid position” and the Fed’s preferred measure of overall inflation has been running at 2.3% the past year. That’s modestly above its 2% goal but Powell added that inflation expectations, which themselves can affect price increases, “have moved up over recent months.”
Although job growth has slowed this year, the unemployment rate remains historically low at 4.2%.
What is the current Fed interest rate?
Powell's comments echo those he has made in recent months and at a news conference following the Fed’s decision last week to hold its key interest rate steady at 4.25% to 4.5% for a fourth straight meeting.
Since then, however, the pressure on officials to reduce rates has increased.
On June 20, two days after the Fed meeting, Trump ratcheted up his barbed assault on the Fed chief, whom Trump elevated to that role in 2018. Calling him a “numbskull,” a “dumb guy,” and a “Trump Hater, Trump wrote on Truth Social that ‘Too Late’ Powell” should cut the Fed’s benchmark rate to 1% to 2%, a move that he said would save the U.S. up to $1 trillion a year in interest costs on its debt.
In recent days, two of Trump’s Republican appointees on the Fed’s policymaking committee backed rate cuts as soon as next month to head off a potential downturn in the labor market.
“Should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting in order to bring it closer to its neutral setting and to sustain a healthy labor market,” said Michelle Bowman, the Fed’s vice chair of supervision, said in a speech Monday.
Fed Governor Christopher Waller made similar remarks on CNBC Friday.
Will the Israel-Iran conflict impact the US economy?
Another inflation risk emerged over the past 12 days with Israel’s attacks on Iran’s nuclear enrichment facilities, Iran’s retaliation and the U.S. strike on Iran’s most critical nuclear material over the weekend. The events raised the possibility of Iran closing the Strait of Hormuz - which transports about a quarter of global seaborne oil shipments – a move that economists said could drive up oil and gasoline prices and significantly increase overall inflation.
But after Iran attacked a U.S. air base in Qatar Monday in what Trump called “a weak response,” oil prices that had climbed sharply tumbled 7% to $68.51 a barrel on investors’ belief that Iran wouldn’t shut the pivotal artery and then slid further after Trump announced the Israel-Iran ceasefire.
The situation, however, is volatile.
Israel already has accused Iran of violating the deal and promised to respond with force, saying it has detected Iranian missile launches. Trump said both sides have violated the ceasefire.
In a research note Tuesday, Oxford Economics said that while "the Israel-Iran ceasefire is likely to prove fragile," oil prices should continue to head down as long as neither nation is inclined "to attack export-related energy infrastructure and/or disrupt shipping flows through the Strait of Hormuz."
The research firm added that "could change quickly" if the conflict affects Iran's ability to export oil "or if the regime felt that it had nothing to lose."
Such uncertainty and the possibility of higher oil prices could give the Fed another reason to wait longer before lowering interest rates.
If crude prices rise significantly, "People will feel that," Powell told lawmakers.
(This story has been updated to add new information)