Powell did not rule out a rate cut in July, tariffs are expected to have an impact on inflation

Author: He Hao, Bu Shuqing, Wall Street News

On Tuesday, Federal Reserve Chairman Jerome Powell spoke at a conference hosted by the European Central Bank in Portugal, along with central bank leaders from Europe and Asia.

Powell said that stable economic activity gives the Fed time to study the impact of tariff increases on prices and economic growth before resuming interest rate cuts. He retains a variety of options. Powell reiterated his previous views on Tuesday:

We are just waiting and watching for now. As long as the U.S. economy remains solid, we think it is prudent to wait, get more information, and see what those effects may be.

A clear majority of Fed officials expect to cut interest rates later this year.

In recent weeks, investors have raised their expectations for the Fed to cut interest rates in the second half of this year as U.S. inflation data for April and May came in below some economists' expectations.

Powell said the Fed would likely continue to gradually cut interest rates this year if it were not for concerns that tariffs could undermine the Fed's final stage of suppressing inflation in recent years. Asked if the Fed would have cut rates again now if Trump had not announced his controversial plan to impose tariffs on many foreign trading partners earlier this year, Powell responded:

I think so. In fact, we paused when we saw the size of the tariffs and the fact that almost all inflation forecasts for the U.S. were significantly higher because of the tariffs.

For the July FOMC meeting at the end of this month, Powell declined to make a forecast, saying the future economic outlook will determine the direction of policy. "I would not rule out any meeting or put it explicitly on the agenda."

On Inflation and the Labor Market

After falling significantly over the past two years, a key measure of core inflation is now stable just above the Fed's 2% target. Core inflation, which excludes food and energy, was 2.7% in May, according to the Fed's preferred measure.

Fed officials generally expect tariffs to push up prices this summer. Powell said Fed officials will be watching closely to see if inflation emerges or does not emerge. "Inflation is behaving as we expected and hoped. We expect to see higher inflation numbers in the summer."

Powell reiterated that the impact of tariffs is expected to show up in inflation data in the coming months, but he also acknowledged that uncertainties remain. "We are watching and expect to see some higher numbers in the summer." He added that the impact of tariffs could be higher or lower than expected and could arrive earlier or later than expected, and policymakers are prepared for this.

Despite strong pressure from Trump to cut interest rates, the Fed has not cut interest rates so far this year, in part to see whether price increases caused by tariffs will evolve into more persistent inflation. So far, however, prices have not risen significantly due to inflation. "We have always said that there is a high degree of uncertainty about the timing, magnitude and duration of inflation," Powell said.

Speaking of the labor market, he said: "We expect the labor market to cool gradually. We are watching very closely for any signs of unexpected weakness."

Testifying before Congress last week, Powell suggested that Fed officials are more likely to wait until at least the September meeting before assessing the extent of price increases driven by tariffs.

Comments from the "New Fed News Agency"

Nick Timiraos, a well-known financial journalist known as the "New Fed News Agency", commented:

Powell's recent remarks, including in the discussion on Tuesday, show that he is working to maintain broad policy flexibility in the coming months. This suggests that the Fed's interest rate cut strategy may change - especially if the final tariff increase is lower than the level announced by Trump in April.

In the past, the Fed may need clear signs of economic deterioration before cutting interest rates, but now Powell hints that in the current environment, weak summer employment data and lower-than-expected price increases may be enough to re-promote interest rate cuts.

Timiraos cited the views of some analysts that the Fed may resume interest rate cuts for another reason: they believe that tariffs are more likely to squeeze corporate profits, weaken economic activity and increase unemployment, rather than trigger persistent and meaningful inflation.

Timiraos pointed out that consumer spending data so far this year shows a slowing trend, especially in discretionary spending such as travel.

Disagreements within the Fed

The Fed voted unanimously to keep interest rates unchanged at its June meeting, but the latest dot plot shows that 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.

Previously, there was a "historical level of division" within the Fed on the path of monetary policy. Bowman and Waller supported a rate cut as early as July because they believed that the price increase caused by tariffs was a one-off; while the hawkish Harker disagreed, and Powell emphasized the need to observe summer data. Some officials are worried that Trump's sharp increase in import tariffs this spring may reignite inflationary pressures, especially after high inflation in the past few years has made companies better at raising prices.

The market expects the Fed to cut interest rates by 70 basis points this year. Citi still expects the first rate cut in September, but admits that the possibility of July has increased.

Pressure from the Trump administration

Powell's speech came after he was subjected to a rare public attack from Trump and his senior advisers, who accused him of partisanship - something Powell strongly denied. The Fed cut interest rates by 1 percentage point last year, while Trump has called for as much as 3 percentage points.

Republicans in Congress are pushing a tax cut bill that some analysts believe will increase fiscal deficits in the coming years. The government's efficiency department has previously tried to cut spending, but it 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 again expressed his desire to lower interest rates on the grounds that it would reduce U.S. interest payments. But this reason is unconvincing to the Fed, whose congressionally mandated duties are to maintain low inflation and strong employment - two conditions that many economists believe are the basis for ultimately achieving lower borrowing costs.

U.S. Treasury Secretary Benson said in a recent television interview that the Fed seems to be still trapped by the "trauma" of the experience of high inflation in 2021-2022. He compared the Fed to an old man who had fallen before and was afraid of falling again so he kept looking down, which made him more likely to fall again.

Although Powell's term as Fed chairman will last until May next year, Bessant has said the White House may nominate his predecessor's successor in October or November to fill the board seat that will be vacant in February next year.

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

At a welcome dinner for a central bank conference on Monday, Powell received a standing ovation from attendees after European Central Bank President Christine Lagarde said Powell "embodied the standard of a courageous central banker."