Powell's Congress Criticizes Trump: Tariff Policy is the main reason for the Federal Reserve's decision not to cut interest rates.

On Tuesday, Federal Reserve Chairman Jerome Powell attended a congressional hearing to speak about the current interest rate policy outlook. He stated that if it weren't for the new round of tariffs initiated by the Trump administration on April 2, the Fed may have already started cutting interest rates. However, the potential inflation risks brought by the tariffs led the decision-makers to choose to stay put. During his testimony before the House Financial Services Committee, Powell bluntly stated, "If we just look at the existing data, the Fed may have already lowered rates to a neutral level, or may have even cut rates once or twice." However, he also emphasized that because "all professional forecasters" generally expect tariffs in the coming months to push up inflation levels, rate cuts must be carried out cautiously. These remarks indirectly addressed recent public criticism from President Trump. Trump wrote on social media on Monday evening, "I hope the Congress will 'clean up' this foolish and stubborn person." Powell downplayed political interference at the hearing, reiterating that the Fed will focus on its own responsibilities and not be influenced by external comments. When asked by lawmakers if he might lower rates at the July meeting, Powell did not give a clear statement and only said that decisions would depend on inflation and employment data. "If inflation pressures continue to be restrained, we will have more room to lower rates 'sooner rather than later.' I won't promise action at a specific meeting," Powell responded. He added, "The current situation is complex, and we need to handle it with caution." While Fed Vice Chairman Richard Clarida and Governor Lael Brainard have hinted that July could be the time for the first rate cut, the market remains cautious. According to CME FedWatch tool data, investors only give an 18.6% probability of a rate cut in July, while the probability for a cut in September is as high as 87%. Powell stated that although the second-quarter economy has not shown significant fluctuations, businesses are already feeling uncertainty about the future. "Many businesses are still working through inventories from February, but are expected to feel the pressure from tariffs starting in the third quarter." In the first quarter, US GDP fell by 0.2% annually, with businesses importing heavily before the tariffs took effect, leading to a 42.6% surge in imports. Despite the economic slowdown, Powell stated that the labor market remains strong, with the unemployment rate holding at 4.2% in May, meeting the "full employment" standard. However, wage growth and labor force participation are showing signs of slowing down. Powell pointed out that core PCE inflation rose by 2.6% year-on-year in May, still above the Fed's 2% target. More concerning is the continuous rise in short-term inflation expectations, as "both market and survey data show signs of a rebound in recent inflation expectations." The next Federal Reserve monetary policy meeting will take place at the end of July, and Powell will continue to testify before the Senate Banking, Housing, and Urban Affairs Committee on Wednesday. The market's focus will be on the upcoming inflation report and whether there are more signs of weakness in the labor market.