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

Authors: He Hao, Bu Shuqing, Wall Street Journal

On Tuesday local time, Federal Reserve Chairman Jerome Powell spoke at a conference 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 time to study the impact of tariff increases on prices and economic growth before resuming rate cuts. He kept various options open. Powell reiterated his previous stance on Tuesday:

We are simply taking a wait-and-see approach. As long as the U.S. economy remains robust, we believe the prudent course is to wait, gather more information, and observe what these impacts might be.
A clear majority of Federal Reserve officials expect rate cuts later this year.

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

Powell indicated that if it weren't for concerns that tariffs might undermine the final stages of the Federal Reserve's efforts to suppress inflation in recent years, the Fed would likely continue to gradually cut rates this year. When asked if the Fed would cut rates again now if Trump had not announced his controversial tariffs on many foreign trading partners earlier this year, Powell replied:

I think so. In fact, when we saw the scale of the tariffs and that nearly all inflation forecasts for the U.S. had risen significantly due to tariffs, we paused rate cuts.

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

On Inflation and the Labor Market

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

Federal Reserve officials generally expect tariffs to push prices higher this summer. Powell stated that Fed officials will closely monitor whether inflation manifests or not. "Inflation is performing as we expected and hoped. We anticipate that summer inflation data will rise."

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

Despite Trump's strong pressure for rate cuts, the Federal Reserve has not cut rates so far this year, partly to observe whether the price increases triggered 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 degree of uncertainty regarding the timing, magnitude, and duration of inflation."

When discussing 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, while testifying before Congress, Powell hinted that Fed 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"

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

Powell's recent remarks, including those in 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 rate-cutting strategy may shift—especially if the final tariff increases are lower than those announced by Trump in April.
In the past, the Federal Reserve might have needed clear signs of economic deterioration to cut rates, but now Powell suggests that in the current environment, weak summer employment data and price increases below expectations might be enough to prompt a rate cut.

Timiraos cited some analysts' views that the Federal Reserve might resume rate cuts for another reason: they believe that tariffs are more likely to compress corporate profits, weaken economic activity, and raise unemployment rates, rather than trigger persistent and meaningful inflation.

Timiraos pointed out that consumer spending data this year has shown signs of slowing, particularly in discretionary spending areas such as travel.

Internal Divisions within the Federal Reserve

The Federal Reserve unanimously voted to keep rates unchanged at the June meeting, but the latest dot plot shows divisions among officials regarding the future path of rates. Ten decision-makers expect at least two rate cuts this year, while seven officials predict no cuts until 2025, and two expect only one rate cut before the end of this year.

According to previous articles from Wall Street Journal, there is a "historically significant division" within the Federal Reserve regarding the monetary policy path. Bowman and Waller support a rate cut as early as July, as they believe the price increases triggered by tariffs are transitory; 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 businesses more adept at raising prices.

The market expects the Federal Reserve to cut rates by 70 basis points this year, with Citigroup still forecasting the first rate cut in September, but acknowledging that the likelihood of a July cut has increased.

Pressure from the Trump Administration

Powell's remarks came after he faced rare public criticism from Trump and his senior advisors, who accused Powell of having partisan inclinations—an accusation Powell firmly denied. The Federal Reserve cut rates by 1 percentage point last year, while Trump has called for cuts of up to 3 percentage points.

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

In a letter sent to Powell on Monday, Trump reiterated his desire to lower interest rates, arguing that it would reduce the U.S. interest expenditure. However, this reasoning lacks persuasiveness in the eyes of the Federal Reserve, as Congress has authorized it 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 Yellen recently stated in a television interview that the Federal Reserve still seems to be haunted by the "trauma" of high inflation in 2021-2022. He compared the Federal Reserve to an elderly person who has fallen; out of fear of falling again, they keep looking down at the ground, making it more likely they will fall again.

Although Powell's term as Federal Reserve Chairman will last until May next year, Yellen has also indicated that the White House may nominate a former successor in October or November to fill the board seat that will become vacant in February next year.

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

At a welcome dinner for central bank meetings on Monday, Powell received a standing ovation from attendees after European Central Bank President Lagarde described him as "the standard of a brave central banker."