Powell's first day of congressional hearings: The Federal Reserve does not need to rush to cut interest rates, and the law does not allow Trump to dismiss Federal Reserve governors

On the first day of the semi-annual congressional hearing on monetary policy, Federal Reserve Chairman Jerome Powell reiterated that the Fed is not in a hurry to cut interest rates and also emphasized that Trump does not have the authority to dismiss decision-makers at the Fed, including himself. He responded to concerns about the closure of the Consumer Financial Protection Bureau (CFPB) due to cost-cutting by the Department of Efficiency (DOGE) and the security of the federal payment system, stating that the U.S. government's payment system remains secure.

During his appearance at the Senate Banking, Housing, and Urban Affairs Committee (referred to as the Banking Committee) hearing on Tuesday, February 11, Powell emphasized in his prepared remarks that the U.S. inflation rate remains high, and economic growth continues to be strong. In this environment, the Fed is patient regarding interest rate adjustments, reiterating the risks of cutting rates too quickly or too slowly, and reaffirming that future adjustments to interest rates will consider data, economic outlook, and risk balance.

Powell said:

"Given that our current policy stance is much less restrictive than before, and the economy remains strong, we do not need to rush to adjust our policy stance. We know that reducing policy restrictions too quickly or too much could hinder progress on inflation (decline). At the same time, reducing policy restrictions too slowly or too little could excessively weaken economic activity and employment. When considering the degree and timing of further adjustments to the federal funds rate target range, the Federal Open Market Committee (FOMC) will assess upcoming data, the evolving outlook, and risk balance."

He then told lawmakers that the U.S. economic situation is quite good, and the Fed "hopes to make more progress in controlling inflation," believing that "our policy rate is at a good level, and there is no reason to rush to lower rates further."

In his remarks on the economy, Powell stated: "Overall, a range of indicators suggest that the labor market is generally balanced. The labor market is not a major source of inflationary pressure." Regarding inflation, Powell commented that over the past two years, the inflation rate has significantly declined but is still "somewhat above" the Fed's long-term target of 2%.

In his remarks, Powell stated that the Fed will adjust interest rates to best achieve its dual mandate of maximum employment and price stability,

"If the economy remains strong and the inflation rate does not continue to move toward 2%, our policy restrictions can be maintained for a longer period. If the labor market unexpectedly weakens or the inflation rate declines faster than expected, we can loosen policy accordingly. We are attentive to the two-sided risks facing our dual mandate, and policy is prepared to address the risks and uncertainties we face."

At the start of the hearing, Bloomberg Industry Research interest rate strategists Ira Jersey and Will Hoffman commented that Powell is unlikely to change the current pause in the Fed's actions during this week's congressional hearing, and the Fed will likely continue to pause rate cuts at least until the next meeting in March. The questions from the Banking Committee on Tuesday leaned more toward political statements rather than monetary policy issues.

After Tuesday's hearing, Nick Timiraos, a senior reporter known for his coverage of the Fed, commented that Powell summarized the Fed's path for 2025: if there is no progress in the decline of inflation, maintain interest rates unchanged;If the economic slowdown is more severe, then interest rates will be lowered**.

Neutral interest rates have risen significantly compared to pre-COVID-19 levels

During the Q&A session of the hearing, a congressman asked whether the neutral interest rate—meaning the rate level that the Federal Reserve believes does not increase inflationary pressures nor suppress inflation—has risen.

Powell responded that yes, the current neutral interest rate is much higher than before the COVID-19 pandemic, and the neutral interest rate before the pandemic was "very, very low." Many of his colleagues on the FOMC also believe that the current neutral interest rate should be higher.

Believing in the security of the payment system, the Federal Reserve acts merely as the Treasury's "agent" in the system

During the hearing, a congressman warned that the DOGE team led by Musk has access to the Treasury's payment system, which could have implications, and claimed that the new U.S. Treasury Secretary, Yellen, seems to be "setting up" the Federal Reserve because he stated that it is the Federal Reserve, not the Treasury, that controls the payment system.

Powell explained that in the federal government's payment system, the Federal Reserve merely acts as the "fiscal agent" of the Treasury, not deciding how or why to spend, but simply processing payments. Powell stated that he believes the federal government's payment system is secure.

Another congressman expressed that many citizens are concerned about DOGE's activities, are "very worried" about the operations of the CFPB, privacy issues, and even the safety of bank deposits.

Powell responded: "I believe that, overall, bank accounts across the country are safe." He pointed out that banks are insured by the Federal Deposit Insurance Corporation (FDIC) and that the banking system is well-capitalized.

A congressman asked about the Federal Reserve's payments to the CFPB, and Powell said that the Fed cannot modify the requests from the CFPB.

A congressman asked whether members of DOGE have accessed the Federal Reserve's federal payment system so far. Powell replied: "I don't believe so."

Powell promised that if Musk or any member of DOGE attempts to access the Federal Reserve's system or infringe upon its independence, he would report it to the Banking Committee.

It is too early to assess the economic impact of tariffs; tariffs may drive up inflation

When asked what would happen if Trump attempted to remove the Federal Reserve's policymakers, Powell replied: "That is clearly not permitted by law."

Regarding trade policy, Powell stated that free trade does not work well when "a major country" does not follow the rules. "I think the standard case for free trade and all of this still makes logical sense." However, he also stated that commenting on and formulating trade policy is not the Federal Reserve's job.

A congressman asked whether the significant increase in tariffs and the resulting deficit from tax cuts would put upward pressure on inflation, further questioning, "Isn't this a simple math problem?"

Powell did not directly answer the impact of tariffs but stated that it is too early to assess the economic impact of tariffs. He said: "What tariff policies will be implemented remains to be seen, and speculation is irresponsible."

When asked if he would stick to the data and not pre-judge how tariffs would affect the economy, Powell replied: "Always."Afterwards, Powell acknowledged to lawmakers that raising inflation is "a possible outcome" of tariffs.

Reflecting on the Collapse of Silicon Valley Bank: A Need to Reassess the Issue of Debanking

Tim Scott, the chairman of the Banking Committee, mentioned the issue of debanking, stating that no one has been held accountable for the collapse of Silicon Valley Bank in 2023. Powell said that the collapse of Silicon Valley Bank was a failure of institutional rules, not an issue with any individual employee. Scott, however, argued that individual employees and supervisors should be held accountable.

Powell stated that he believes it is fair to reassess debanking from a new perspective. The issue of debanking needs to be reexamined, and the Federal Reserve will do so. When discussing the collapse of Silicon Valley Bank, Powell remarked, "Everyone has learned a lot from it and is determined to do better."

No Regulatory Agency Can Replace the Work of the CFPB; The Fed's Oversight of Banks to Protect Consumers Remains Unchanged

A lawmaker mentioned the Consumer Financial Protection Bureau (CFPB), which was temporarily closed due to funding cuts by the Trump administration, and asked who was looking out for consumer interests in the banking industry during the CFPB's closure. Powell responded, "No other federal regulatory agency." He also stated that saying the CFPB would not fulfill its regulatory responsibilities is merely "a hypothesis."

When asked if the Federal Reserve is still working to ensure small banks comply with consumer financial laws, Powell replied, "Still working. Everything remains the same."

When questioned about changes to bank stress tests, Powell pointed out that there have been "significant changes" in the relevant administrative laws.

Powell stated that after the new banking regulatory team appointed by the Trump administration took office, the Federal Reserve looks forward to working with them to achieve the final goal of Basel III, which is a series of global banking regulatory reforms. Powell reiterated that he believes the capital levels that large banks need to hold are "roughly correct."

10-Year U.S. Treasury Yield May Remain High; The Fed Cannot Control Long-Term Interest Rates

A lawmaker from Nevada stated that residents of the state expect mortgage rates to decrease and asked if mortgage rates could drop to 6% this year.

Powell said that this is actually unrelated to the Federal Reserve's policies and depends on the yield of the 10-year U.S. Treasury. Mortgage rates may still remain high, and even if that rate decreases, there may still be issues with housing supply shortages in many areas of the housing market.

Powell hinted that the 10-year U.S. Treasury yield "may remain high," but once the Federal Reserve lowers interest rates, long-term borrowing costs should also decrease, although "I don't know when that will happen."

A lawmaker asked Powell why the Federal Reserve cannot control long-term interest rates. He explained that there are many factors involved, such as inflation expectations and the trajectory of the budget deficit. "We have some influence, but most of the time we do not."

Rising Term Premium May Partially Stem from Debt Market Investors Considering Increased Issuance

Powell stated that the overall numbers are "very favorable for the economy," but he acknowledged that the public is feeling the impact of inflation. He said this serves as a reminder of how much people hate inflation.

Powell indicated that in terms of federal government debt, investors in the U.S. Treasury market "will consider the upcoming federal debt supply." He noted that there may be some connection between the two, but he made it clear that the inflation outbreak "has many causes.""This may be part of the reason for the rise in term premium."

Last month, Wall Street Journal mentioned that the term premium is the main reason for the recent rise in U.S. Treasury yields. Analysts believe that the uncertainty of Trump's policies and the contradiction between supply and demand for U.S. Treasuries have pushed the term premium to a high level.

Will stop balance sheet reduction when reserves are slightly above adequate levels; currently, reserves are still ample

When asked about the Federal Reserve's balance sheet, Powell said that the Fed intends to slow the pace of balance sheet reduction and will stop when bank reserve balances are somewhat above what the Fed judges to be adequate levels. Recent data shows that reserves are still ample.

"Basically, we will focus on the conditions of reserves, the market conditions of reserves, and will stop when we believe it is slightly above adequate levels. This work is still ongoing, and we have a way to go."

Powell stated that quantitative easing (QE) is a tool that will only be used when interest rates are at zero and cannot be lowered further. "We are still a long way from zero interest rates."

Now is the best time to correct the unsustainable government budget

Some lawmakers mentioned that the U.S. federal government's debt and the cost of debt financing have both increased. Powell took the opportunity to urge Congress to reduce the deficit, reiterating that the federal government's high deficit is unsustainable and that now is the best time to address this issue.

Powell stated:

"The U.S. federal government's budget is on an unsustainable path."

"Now is the best time to start addressing this issue."

"The GSEs" have indeed lowered mortgage rates; privatization has certain appeal in the long run

Some lawmakers mentioned the proposal to withdraw the U.S. government's conservatorship of Fannie Mae and Freddie Mac—the "GSEs"—and asked about the potential impact on the housing market.

Powell stated that privatizing these two mortgage giants "has certain appeal" in the long run. He indicated that he would not comment on the restructuring or privatization of these entities, as that is the work of Congress. However, he added: "I believe it has indeed lowered mortgage rates—in fact, they are sovereign risk entities."

Supply is key to the recovery of the housing market

When asked about the decline in housing affordability, Powell stated that this is partly an issue of local regulation, inflation, and long-term interest rates, which are not directly set by the Federal Reserve.

Later, when another lawmaker asked about housing issues, Powell stated that increasing supply is actually the responsibility of Congress, not the Federal Reserve. The lawmaker believed that lower interest rates would increase housing supply, while Powell stated that this would also increase demand. Powell believes that supply is key to the recovery of the housing market.

Support establishing a regulatory framework for stablecoins to protect consumers; will not issue central bank digital currency

A lawmaker stated that regulation needs to promote innovation while ensuring safety. Some lawmakers are studying stablecoin regulation and hope to ensure that protections in this area are in placePowell said that the Federal Reserve supports efforts to establish a regulatory framework for stablecoins to protect consumers. The Fed will provide their technical ideas.

Subsequently, a lawmaker asked Powell to commit that the Federal Reserve would never own a Central Bank Digital Currency (CBDC). Powell stated that as long as he is the chairman of the Federal Reserve, the U.S. will not issue a CBDC.

The Housing Insurance Shortage Should Be Addressed by States

A lawmaker asked how to view the risks of climate change, housing insurance, and financial stability.

Powell emphasized that the Federal Reserve does not regulate insurance companies. However, he pointed out that the insurance industry has withdrawn from vulnerable areas. The banking sector may also withdraw. He said the risk is that people will be unable to obtain insurance in related areas. State and local governments need to consider providing insurance for vulnerable areas. He is unsure if this constitutes a financial stability issue, but it "will have economic consequences."

In other words, Powell believes that the housing insurance shortage issue should be addressed by the states themselves.

The Federal Reserve is Not "Overstaffed," but Rather "Overworked"

In response to questions, Powell hinted that he did not want to get involved in partisan disputes. He said, "If we (the Federal Reserve) focus solely on our work and stay away from politics, we can formulate better policies and reduce inflation."

A lawmaker asked about the principles of public service and how Powell views the Federal Reserve's employees. Powell expressed pride in working with them and emphasized the efforts made by employees to maintain the functioning of the financial system and the economy during the pandemic.

The lawmaker further asked Powell if he believed the Federal Reserve was "overstaffed." Powell denied that it was "overstaffed," then stated that the Fed's employees might be "overworked."

Commentators noted that this was clearly a response to the context of the Trump administration's push for government downsizing