Next week's focus: Powell goes to Capitol Hill to defend against interest rate cuts

Federal Reserve Chairman Jerome Powell will head to Capitol Hill to face questioning from lawmakers. During this visit, he will defend a key decision: why the Federal Reserve has chosen to remain on hold and pause interest rate cuts amid the clouds of trade friction and concerns about economic slowdown? A debate surrounding the direction of monetary policy is about to unfold in Congress.

Powell will personally go to Capitol Hill next week for a crucial defense of monetary policy. According to the established schedule, he will submit the semiannual monetary policy report and testify before the U.S. House Financial Services Committee on Tuesday (June 24) and before the Senate Banking Committee on Wednesday (June 25).

Bloomberg analysis indicates that Powell is expected to reiterate the Federal Reserve's cautious policy stance. While there is still a possibility of rate cuts this year, they hope to clarify the economic impact of the White House's trade policy before considering any cuts.

In the last monetary policy meeting, the Federal Open Market Committee (FOMC) voted again to keep the federal funds rate target range unchanged at 4.25%-4.50%. The latest dot plot still shows that most officials expect two rate cuts this year, but the proportion of those supporting only one cut or no cuts at all has increased.

Currently, the Federal Reserve is in a wait-and-see mode. Core inflation is declining, the labor market is relatively balanced, and policymakers have stated that they "are fully conditioned to wait." The next policy decision by the Federal Reserve will be made on July 30. Powell's testimony in Congress next week may provide more policy guidance.

Policy Report: Easing Inflation Accompanied by New Risks

Before heading to Capitol Hill, the Federal Reserve released its semiannual policy report to set the tone for the hearing.

The semiannual report reveals dual signals. On one hand, core inflation shows signs of easing, and financial markets remain stable, reinforcing the rationale for the current wait-and-see stance. On the other hand, the report highlights several threats: since mid-2024, immigration has "slowed sharply," dragging down labor supply growth; at the same time, new tariff policies have raised price expectations.

The report specifically cites a University of Michigan survey: June's one-year inflation expectations soared to 5.1% (up from 2.8% in December last year), and long-term expectations rose to 4.1%, with most respondents citing tariffs as a contributing factor. Although durable goods inflation has slightly increased, the Federal Reserve emphasizes that it is "too early to assess the impact of tariffs."

Next Friday (June 27), the U.S. will release the May PCE price index. Currently, economists expect the U.S. May PCE price index to increase by 2.3% year-on-year, up 0.2 percentage points from last month's 2.1%; the core PCE price index is expected to rise by 2.6% year-on-year, accelerating by 0.1 percentage points from last month, indicating a moderate warming of inflation. Analysts point out that based on month-on-month expected values, the past three months will be the three months with the mildest increases in five years.

Economists analyze that this moderate rise will not provide much clarity on the inflation upside risks in the coming months.

Interest Rate Path: Divergence Amidst Caution

Current policy is anchored on balancing risks and data dependence. The report notes that officials maintained the possibility of two rate cuts this year in their June forecasts, but the proportion of decision-makers supporting a single cut or no cuts has increased. Although the job market has cooled, it remains tight, with stagnant wage growth conflicting with a decline in labor participation ratesBarron's analysis states that Powell's testimony will directly address this divergence. The Federal Reserve claims to be "in a favorable waiting position," but if the hearing reinforces the threat of tariffs or immigration on prices, it may weaken the market's bets on interest rate cuts. Investors will assess the threshold for a policy shift from this.

At the same time, there is not complete unity within the Federal Reserve. Governor Christopher Waller publicly expressed a relatively dovish view on June 21. He believes that the inflationary push from tariffs "may be temporary" and hinted that if subsequent data supports it, the Federal Reserve has the space to resume interest rate cuts as early as the policy meeting on July 30. This statement will inevitably subject Powell's testimony on Capitol Hill next week to more stringent market scrutiny, as he needs to reconcile differing internal views within an overall cautious tone