Powell did not rule out the possibility of a rate cut in July, stating that if it were not for tariffs, interest rates would have already been lowered, and tariffs are expected to have an impact on inflation.

Powell stated that if it weren't for concerns that tariffs could disrupt the final stage of the Federal Reserve's efforts to suppress inflation in recent years, the Federal Reserve would likely continue to gradually cut interest rates this year.

Written by: He Hao, Bu Shuqing

Source: Wall Street Journal

On Tuesday local time, Federal Reserve Chairman Powell spoke at a meeting hosted by the European Central Bank in Portugal, alongside central bank leaders from Europe and Asia.

Powell stated that stable economic activity gives the Federal Reserve (FED) time to study the impact of tariff increases on prices and economic growth before resuming rate cuts. He has kept multiple options available. Powell reiterated his previous views on Tuesday:

We are just taking a wait-and-see approach. As long as the U.S. economy remains robust, we believe a cautious approach is to wait, gather more information, and observe what these impacts might be.

The Federal Reserve (FED) has a clear majority of officials expecting a rate cut later this year.

In recent weeks, due to the inflation data for April and May in the United States being lower than some economists' expectations, investors have increased their expectations for the Federal Reserve (FED) to cut interest rates in the second half of this year.

Powell stated that if it were not for concerns that tariffs could undermine the final stages of the Federal Reserve's efforts to suppress inflation in recent years, the Federal Reserve would likely continue to gradually lower interest rates this year. When asked if the Federal Reserve would consider lowering rates again now if Trump had not announced his controversial plan to impose tariffs on many foreign trading partners earlier this year, Powell replied:

I think so. In fact, when we look at the scale of tariffs, and almost all inflation forecasts for the United States have risen significantly due to tariffs, we paused interest rate cuts.

Regarding the upcoming July FOMC meeting at the end of this month, Powell refused to make predictions, stating that the future economic outlook will determine the direction of policy. "I will not rule out any meeting, nor will I explicitly put it on the agenda."

About Inflation and the Labor Market

After a significant decline over the past two years, a key core inflation indicator is currently stabilizing just above the Federal Reserve's 2% target. According to the Federal Reserve's preferred measure, core inflation excluding food and energy was 2.7% in May.

Federal Reserve officials generally expect tariffs to drive up prices this summer. Powell stated that Federal Reserve officials will closely monitor whether inflation appears or does not appear. "Inflation is performing as we expect and hope. We anticipate that summer inflation data will rise."

Powell reiterated that the impact of tariffs is expected to manifest in inflation data over the coming months, but he also acknowledged that uncertainties remain. "We are monitoring this and expect to see some higher numbers in the summer." He added that the impact of tariffs could be above or below expectations, and the timing could come sooner or later than anticipated, and policymakers are psychologically prepared for this.

Despite Trump's strong pressure for interest rate cuts, the Federal Reserve has not cut rates so far this year, partly to observe whether the price increases caused by tariffs will evolve into more persistent inflation. However, so far, prices have not risen significantly due to inflation. Powell said, "We have always said that there is a high level of uncertainty regarding the timing, magnitude, and duration of inflation."

When talking about the labor market, he said: "We expect the labor market to gradually cool down. We are closely monitoring any signs of unexpected weakness."

Last week, during his testimony in Congress, Powell hinted that Federal Reserve officials are more likely to wait until at least after the September meeting to assess the extent of price increases driven by tariffs.

Commentary from the New Federal Reserve News Agency

Famous financial journalist Nick Timiraos, known as the "New Federal Reserve News Agency", commented that:

Powell's recent comments, including during Tuesday's discussion, indicate that he is striving to maintain broad flexibility in policy over the coming months. This suggests that the Federal Reserve's interest rate cut strategy may change—especially if the final tariff increases are lower than the levels announced by Trump in April.

In the past, the Federal Reserve (FED) might have required clear signs of economic deterioration before cutting interest rates, but now Powell suggests that in the current environment, weak summer employment data and price increases below expectations may be enough to prompt a rate cut.

Timiraos cites the views of some analysts who believe that the Federal Reserve may resume rate cuts for another reason: they think tariffs are more likely to squeeze corporate profits, weaken economic activity, and raise unemployment rates, rather than trigger persistent and meaningful inflation.

Timiraos pointed out that consumer spending data so far this year shows signs of slowing down, particularly in discretionary spending such as travel.

The Federal Reserve (FED) Internal Divisions

The Federal Reserve (FED) voted unanimously at the June meeting to keep interest rates unchanged, but the latest dot plot shows officials are divided on the future path of interest rates. Ten policymakers expect at least two rate cuts this year, seven officials predict no rate cuts in 2025, and two expect only one rate cut before the end of this year.

According to previous articles, there is a "historical-level split" within The Federal Reserve (FED) regarding the monetary policy path. Bowman and Waller support a rate cut as early as July because they believe that the price increases caused by tariffs are one-time events; however, hawkish Harker disagrees, and Powell emphasizes the need to observe summer data. Some officials are concerned that Trump's significant increase in import tariffs this spring could reignite inflationary pressures, especially after high inflation in recent years has made companies more adept at raising prices.

The market expects the Federal Reserve to cut interest rates by 70 basis points this year, while Citigroup still anticipates the first rate cut in September, but acknowledges that the possibility for July has increased.

The Pressure from the Trump Administration

Powell's speech came after he faced rare public criticism from Trump and his senior advisers, who accused Powell of having a partisan bias—an accusation Powell firmly denied. The Federal Reserve has cut interest rates by 1 percentage point last year, while Trump had called for cuts of as much as 3 percentage points.

Republicans in the U.S. Congress are pushing for a tax cut bill, and some analysts believe this will exacerbate the budget deficit in the coming years. Previously, the U.S. government's efficiency office attempted to cut spending, but fell far short of expectations, highlighting the difficulty of reducing the deficit.

In a letter to Powell released by the White House on Monday, Trump once again expressed his desire to lower interest rates, arguing that this would reduce the interest expenses of the United States. However, this reasoning lacks persuasiveness in the eyes of the Federal Reserve, as its mandated responsibilities are to maintain low inflation and strong employment—conditions that many economists believe are the foundation for ultimately achieving lower borrowing costs.

U.S. Treasury Secretary Becerra recently stated in a television interview that the Federal Reserve (FED) seems to still be haunted by the "trauma" of high inflation experienced in 2021-2022. He likened the FED to an elderly person who has fallen before; out of fear of falling again, they keep their head down while walking, making it even easier to fall again.

Although Powell's term as chairman of the Federal Reserve (FED) will last until May next year, Bessenet has also stated that the White House may nominate a former successor in October or November to fill the board position that will become vacant in February next year.

Powell deliberately avoided responding to the White House's ongoing criticism of his intelligence and integrity on Tuesday.

At the welcome dinner of the central bank meeting held on Monday, Powell received a standing ovation from the attendees after ECB President Lagarde described him as "the standard of a brave central banker."