Federal Reserve chief Jerome Powell on Tuesday said a good case could be made for the cutting interest rates soon, but he said the Fed is holding off for now because of an expected increase in inflation from U.S. trade wars.
In his semi-annual testimony to Congress, Powell was repeatedly pressed by Republicans to explain why the Fed isn’t cutting rates now. They pointed to a relatively low rate of U.S. inflation and noted that central banks around the world have slashed their own borrowing costs.
“If you just look in the rearview mirror and look at the existing data that we’ve seen, you could make a good argument that it would call for us to be at a neutral level, which would be a couple of cuts or maybe more,” Powell said.
At the same time, though, virtually every economic forecaster including those at the Fed “expect a meaningful increase in inflation over the course of this year,” he said.
The Fed would be prepared to adjust interest rates, Powell said, once it has a better grasp on how the trade wars play out.
“This doesn’t suggest he is in a hurry to cut rates,” said James Knightley, chief international economist at ING.
The Fed left a key U.S. interest rate unchanged last week for the fourth meeting in a row. The last time the bank cut rates was in December.
The reluctance of Powell and the Fed to cut rates has earned the enmity of Trump, who lashed out again on the social media site Truth Social. He called on Republicans to go after Powell in the hearing.
“I hope Congress really works this very dumb, hardheaded person, over,” Trump tweeted.
Trump has been demanding the Fed cut rates for months, arguing inflation is low and that borrowing costs are too high. High rates are costing the federal government dearly in interest on U.S. debt, Trump has also said.
The Fed appears to be increasingly split over the timing and extent of ratae cuts.
Fed Govs. Chris Waller and Michelle Bowman said after the bank stood pat last week that they would be open to a rate cut at the July 29-30 meeting. Both governors were appointed to the Fed board in Trump’s first term.
Asked about their comments, Powell said he “wouldn’t comment on any other [Fed] member’s comments one way or the other.”
“But I will say this: Many paths are possible here,” he added. ”We could see inflation come in not as strong as we expect, and if that were the case it would suggest cutting sooner.”
Investors don’t expect the first rate cut in September. Betting markets predict the Fed will cut rates in two of its four meetings left in the year.
Waller and Bowman contended that the rise in inflation from tariffs will be short-lived and mostly fade away by next year.
They are more worried about a softening in the jobs market and a potential rise in unemployment. Why wait until the labor market deteriorated further, they said, before acting.
The Fed’s forecast sees inflation rising to 3% in 2025 from a current level of 2.1%. Then it would drop back to 2.4% in 2026 and then 2.1% the year after that.
The bank’s goal is to lower the rate of inflation to 2% in the long run.
Powell’s tenure as chairman ends next May and Trump plans to replace him. Waller is viewed by Wall Street as a potential successor.
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