Powell's Congressional Hearing Day After: Tariffs Unprecedented, Impact on Inflation Hard to Gauge
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Powell's Congressional Hearing Day After: Tariffs Unprecedented, Impact on Inflation Hard to Gauge
Trade deals could prompt the Fed to consider rate cuts.
Navigating Web3 tides with focused insightsBy Li Dan, Wall Street Horizon
The day after a congressional hearing focused on the Federal Reserve's monetary policy, Fed Chair Jerome Powell once again addressed the prospect of rate cuts. He reiterated that the Fed is not in a hurry to cut rates, emphasized that high tariffs bring significant uncertainty, noted that the U.S. economy remains strong, and said there is justification for proceeding cautiously amid uncertainty—while also mentioning some factors that could eventually support rate cuts.
At a Senate Banking, Housing, and Urban Affairs Committee hearing on Wednesday, June 25, Eastern Time, Powell told lawmakers that future trade agreements might allow the Federal Reserve to consider cutting interest rates.
Regarding the Trump administration’s policies, Powell said the updated economic projections (SEP) released after the Fed’s previous meeting partially reflected the impact of trade policy. However, current tariff levels are historically unprecedented, making it difficult to predict how they will affect inflation. During times of uncertainty, moving slowly with monetary policy is appropriate.
On inflation, Powell stated that stagflation is not a baseline assumption for the U.S. economy, but the Fed is monitoring price trends. Over time, regulation can also contribute to slower inflation.
No Modern Precedent for Current High Tariffs; Inflation Impact Will Emerge in Coming Months
Testifying before Congress, Powell said the lack of historical precedent makes it hard for Fed officials to assess the potential effects of the Trump administration’s trade policies. “There is no modern experience here. The scale of tariffs during President Trump’s first term was only one-sixth of what we’re seeing now.”
Because there is no precedent, the Fed currently faces uncertainty in formulating any policy adjustments. Powell said:
“One reason this is so challenging is the absence of a modern precedent. We must remain humble about our estimates. The inflationary pass-through could be greater than we imagine—or smaller. That’s why we’re not rushing to act.”
Powell said the Fed is waiting to see who ultimately bears the brunt of the tariffs and how they will show up in measured inflation.
He believes the Trump administration’s tariff measures could push inflation higher over the coming months.
Powell said it’s reasonable to expect tariffs to cause some inflation. Most Fed officials support rate cuts this year, and the central bank wants to observe how inflation evolves in the next few months.
“Tariffs will bring some inflation. It hasn’t shown up yet, but it will emerge over the next several months.”
Consumers May Bear Part of Tariff Costs; Hard to Predict in Advance; Fed Still Assessing Impact and Awaiting More Data
During Tuesday’s House hearing, Powell said data indicate at least some of the tariff burden will fall on consumers. Initially, importers pay the tariffs, but over time, five different groups share the cost: manufacturers, exporters, retailers, and consumers.
On Wednesday, Powell added that the Fed is still working to determine how tariffs affect consumer prices. He said:
“The question is: Who pays for these tariffs? How much of it shows up in inflation? Frankly, that’s very hard to predict in advance.”
Powell believes consumers may end up bearing part of the cost of import tariffs. He noted tariffs could result in hundreds of billions of dollars in annual losses, “and some of that will be borne by consumers. We’re just waiting for more data.”
Some Republican senators criticized Powell for identifying tariffs as a potential driver of inflation. Senator Pete Ricketts argued tariffs might only cause a one-time price increase without fueling sustained inflation.
Another senator, Bernie Moreno, accused Powell of political bias, saying, “You should reflect on whether you’re viewing this from a fiscal or political perspective, because you simply don’t like tariffs.” Powell did not respond.
Nonetheless, Powell reiterated that most Fed officials do support rate cuts this year. He added that tariffs might not significantly push up inflation after all.
During Tuesday’s House hearing, Powell had already suggested the inflationary impact of tariffs could be less than expected. When asked about the possibility of a July rate cut, he said “many paths are possible,” noting that weaker-than-expected inflation or a softening labor market could lead to earlier rate cuts.
Rarely Touches Fiscal Issues: Congress Should Consider Student Loan Debt
Powell has previously described the U.S. government’s fiscal deficit as unsustainable, noting that debt growth outpaces economic growth. At this hearing, he brought up government debt again.
Powell said the Federal Open Market Committee (FOMC) does not factor federal government debt into its monetary policy decisions. While fiscal policy can exacerbate inflationary pressures, the Fed does not comment on such risks. The size of U.S. debt has not impaired the Fed’s ability to fulfill its mandate.
Powell typically avoids commenting on fiscal policy. But during Wednesday’s hearing, he made a rare exception when discussing student loan debt.
Powell said student loan debt “appears to be an issue Congress needs to consider.” Such debt can negatively affect borrowers’ ability to fully participate in the economy and thus weigh on overall economic performance.
“You can take out loans for all kinds of investments, and if you can’t repay, you can discharge them through bankruptcy. The one exception is student loans. I wonder—is this sound national policy? For people who borrowed to invest in education, we don’t offer relief.”
Treasury Market Functioning Well, Liquidity Adequate; Dollar Remains Global Reserve Currency
On the U.S. bond market, Powell said it is currently performing well, functioning normally, with appropriate liquidity.
He reaffirmed that the dollar remains the world’s primary reserve currency. While he declined to comment on whether the dollar is overvalued, he acknowledged that some believe it is.
During Tuesday’s House hearing, Powell defended the dollar’s global standing, saying it remains the top safe-haven currency, and April’s volatility in the Treasury market did not undermine that status.
Eliminating Interest on Reserves Would Not Save Banks Money
Powell said eliminating the mechanism that pays banks interest on reserves held at the Fed would not save banks money. Restoring a scarce reserve regime would be challenging and could trigger market volatility.
Responding to proposals to end interest payments on bank reserves, Powell said, “There’s a fantasy that this would save money, but it’s just not true. If you want to go back to the era of scarce reserves, it would be a long, bumpy, and turbulent road. I don’t recommend we take that path. Ample reserves mean ample liquidity, which allows banks to keep lending.”
Congress authorized the interest-on-reserves mechanism before 2006. Since then, the Fed has used the interest rate on excess reserves (IORB)—also known as the rate on reserve balances—as one of its key tools to control short-term interest rates. IORB acts as the ceiling of the Fed’s interest rate corridor, while the overnight reverse repo rate (ON RRP) serves as the floor.
Reports Claiming $2.5 Billion Fed Headquarters Renovation Are Sensationalized
In recent months, media reports have claimed the renovation of the Federal Reserve’s headquarters building—the Marriner S. Eccles Building in Washington, D.C.—could cost around $2.5 billion, drawing public criticism. Elon Musk, formerly leading the Department of Government Efficiency (DOGE), specifically mentioned the project, saying, “We absolutely need to look into whether the Fed spent $2.5 billion on interior designers. That’s shocking.”
During Wednesday’s hearing, lawmakers questioned the renovation plan. Powell responded that the Fed “takes seriously its responsibility as a steward of public funds,” adding that “no one is eager to renovate a historic building.” He said the building is neither safe nor waterproof and requires renovation—a matter that can be left to his successor.
Early media reports on the Marriner S. Eccles Building’s plans included features like rooftop gardens, water features, and upgraded executive dining areas. Powell said on Wednesday that these reports were inaccurate and sensationalized.
“None of the sensational elements reported are in the current plans. There is no VIP dining room, no new marble, no private elevators. No new water features, no beehives, no rooftop garden terraces.”
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