Powell's congressional hearing the next day: The Federal Reserve may adjust interest rates due to tariffs, CPI shows more effort is needed to reduce inflation

The day after the semi-annual congressional hearing on monetary policy, Federal Reserve Chairman Jerome Powell directly mentioned that tariffs could influence the Fed's decisions and commented on the latest CPI data, stating that the Fed still has more work to do in reducing inflation.

On Wednesday, February 12, Eastern Time, Powell stated at the House Financial Services Committee hearing that the Fed is analyzing the impact of tariffs under various scenarios. He noted that it is not the Fed's job to comment on whether policies set by Congress or the government are wise; however, new policies could prompt the Fed to change interest rates. He said:

"The underlying economy is very strong, but there is some uncertainty with the new policies. We can only wait to see how these policies perform before considering what we can do."

"It is possible that the Fed may have to adjust interest rates regarding tariff policies."

Powell also mentioned that the Fed makes decisions based on economic conditions.

Similar to the first day of the congressional hearing on Tuesday, Powell read a prepared speech before answering questions from lawmakers, reiterating that the Fed is not in a hurry to cut interest rates, stating that the economy remains strong and inflation is still "somewhat above" the Fed's target, and there is no need to rush to adjust rates. The speech also noted that the Fed is focused on the dual mandate of employment and inflation, facing risks on both sides, and that policies are prepared to address risks and uncertainties.

Before Powell's remarks, earlier on Wednesday, President Trump posted on social media calling for lower interest rates, stating that rates should be lowered and should "keep pace" with the new tariffs to be implemented.

Trump's chief economic advisor and director of the White House National Economic Council, Kevin Hassett, later stated that Trump's comments lean more towards government policy actions rather than "persuading" the Fed, saying, "We are taking proactive steps to lower interest rates." Hassett noted that the yield on the 10-year U.S. Treasury bond has recently declined, asserting that Trump's "macroeconomic policies are working," and after the CPI was released on Wednesday, the yield on the 10-year Treasury bond rose.

During Tuesday's hearing, Powell acknowledged to Senate lawmakers that raising inflation is "a possible outcome" of tariffs. He believes it is too early to assess the economic impact of tariffs, stating, "Which tariff policies to implement remains to be seen, and speculation is irresponsible."

Not Excited by One or Two Data Points "Hope to Maintain Restrictive Policy Temporarily"

Powell stated at the hearing that the CPI data released on Wednesday was higher than "almost all expectations," indicating that the Fed has made substantial progress in curbing inflation, but there is still more work to do. The Fed is close to, but has not yet achieved, its long-term inflation target of 2%. He hinted that interest rates will remain high for the foreseeable future.

"In terms of inflation, we are close to the target, but we have not achieved it." Compared to last year's inflation rate of 2.6%, there has been "significant progress, but we have not reached this target."

"So, we hope to maintain a restrictive policy temporarily."At the same time, Powell stated that he would be "vigilant" against overinterpreting the CPI report.

"We won't get excited about one or two good data points, nor will we be agitated by one or two bad data points."

Powell then said that compared to the CPI, the Federal Reserve would be more concerned with the Personal Consumption Expenditures (PCE) price index released by the U.S. Department of Commerce, calling PCE a "better inflation indicator." He will wait for the PPI data to be released on Thursday to observe its impact on PCE inflation data.

The January CPI and core CPI growth released on Wednesday were all above expectations. The January CPI increased by 0.5% month-on-month, the highest growth rate since August 2023, while the market expected the growth rate to slow from 0.4% in December to 0.3%. The January CPI increased by 3.0% year-on-year, the highest growth rate in seven months, with Wall Street expecting the growth rate to remain flat at December's 2.9%.

The January core CPI increased by 0.4% month-on-month, with the market expecting the growth rate to accelerate from 0.2% in December to 0.3%. The core CPI increased by 3.3% year-on-year, with the market expecting the growth rate to slow from 3.2% in December to 3.1%.

The CPI data dampened market expectations for interest rate cuts. After the data was released, traders expected only one 25 basis point rate cut from the Federal Reserve this year, pushing the expected rate cut time from September to December, whereas before the CPI release, they leaned towards expecting two rate cuts.

"There is enough time to wait" for restrictive monetary policy to take effect "There are ways to continue to reduce the balance sheet"

Powell stated that regarding monetary policy, the Federal Reserve has time to patiently wait for restrictive policies to take effect. In hindsight, the Federal Reserve might have should have ended quantitative easing (QE) earlier.

"The economy is strong, the labor market is robust, and we have enough time to wait for our restrictive policies to take effect and reduce inflation again."

"Last year we did not make much progress on core PCE," "We hope to see recovery progress."

Regarding the reduction of the balance sheet, Powell said, "We have ways to continue to reduce the balance sheet," and reiterated that current bank reserves are "ample," stating that all evidence indicates that reserves remain "ample."

On Tuesday, Powell said that the Fed intends to slow the pace of balance sheet reduction and will stop when bank reserves are "a bit above" what the Fed judges to be sufficient levels, also noting that recent data shows reserves remain ample.

He won't resign even if Trump asks

Like the hearing on Tuesday, Powell also responded on Wednesday to whether Trump could influence the Federal Reserve decision-makers. Powell said he would not resign even if Trump asked him to.

On Tuesday, when asked what would happen if Trump tried to dismiss Federal Reserve policymakers, Powell replied, "That is clearly not allowed by law."

The Federal Reserve has not been cut off from access to necessary data DOGE access to the payment system is very cautious

The government efficiency department (DOGE) led by Musk has recently come under controversy for having access to key systems that handle government payments through the Treasury. On Wednesday, Powell was again asked about DOGE's access to this payment system. Powell pointed out that access to these tools is "very cautious."Powell stated that the Federal Reserve has not been cut off from any data access necessary for its work and still has access to the required data. He is not aware of the Federal Reserve losing anything it needs and indicated that he would speak frankly if any issues arise.

Like on Tuesday, Powell was again recently asked about the halt of work at the Consumer Financial Protection Bureau (CFPB) ordered by the Trump administration. He expressed uncertainty about the outcome of the CFPB. If DOGE exits the historical stage, it will leave a regulatory gap in the U.S. financial sector.

On Tuesday, Powell said that no regulatory agency can replace the work of the CFPB, and the Federal Reserve continues to ensure that small banks comply with consumer financial laws.

Establishing the position of Vice Chairman for Financial Regulation at the Federal Reserve leads to greater volatility in regulatory policies

Regarding banking regulation, Powell stated that his long-term view is that bank capital is "probably reasonable."

At the beginning of January this year, the Federal Reserve announced that Vice Chairman for Financial Regulation Barr would resign on February 28. If a successor is confirmed, he will resign earlier but will continue to serve as a Federal Reserve governor. Powell mentioned at the hearing that the Federal Reserve would perform the duties in the interim before the new regulatory vice chairman takes office and will advance regulatory responsibilities in the absence of the vice chairman.

Powell also noted that before the implementation of the Dodd-Frank Act, U.S. regulatory policies were not as volatile. The establishment of a vice chairman position responsible for financial regulatory affairs at the Federal Reserve makes regulatory policies more prone to change. "Certainly, putting everything in the hands of one person, just to advise the Federal Reserve—could lead to some fluctuations."

Commentators believe that Powell's view that the Federal Reserve's role as "banking police" could lead to increased volatility suggests that the Federal Reserve can perform its duties more effectively without that vice chairman. The current vice chairman, Barr, was appointed during the Biden administration. Trump may have to select someone from the existing Federal Reserve governors to serve as the regulatory vice chairman.

The Federal Reserve has not prohibited the banking sector from participating in cryptocurrency activities

Additionally, Powell discussed cryptocurrency in relation to banking regulation. He stated that he does not wish to hinder the banking sector from providing services to legitimate customers. Many cryptocurrency activities can be conducted within the banking sector. The Federal Reserve has not told the banking sector that it cannot participate in cryptocurrency activities.

At Tuesday's hearing, Powell said that the Federal Reserve supports efforts to establish a regulatory framework for stablecoins to protect consumers and promised that as long as he is the chairman of the Federal Reserve, the U.S. will not issue a central bank digital currency (CBDC).

The 2020 policy framework did not restrict the Federal Reserve's response to inflation

The Federal Reserve has a "framework review" plan conducted every five years, with the last framework review completed in the summer of 2020. The latest framework review began at the end of January this year, focusing on two main areas: "long-term goals and monetary policy strategy statement" and policy communication tools.

At Wednesday's hearing, Powell mentioned the framework review, stating that he believes Federal Reserve officials will make appropriate and cautious adjustments to the Federal Reserve's long-term policy strategy and expects the latest review to be completed by the end of this summer. When asked whether the 2020 framework restricted the Federal Reserve's policy response to inflation, Powell replied, "No."”