Powell will face congressional "grilling" today and tomorrow to defend his stance on keeping interest rates unchanged

Powell will appear before Congress this week to defend the Federal Reserve's decision to keep interest rates unchanged for the fourth consecutive time and respond to Trump's ongoing pressure to cut rates.

On Tuesday and Wednesday, Federal Reserve Chairman Powell will attend hearings before the House Financial Services Committee and the Senate Banking Committee, respectively. Following the Fed's decision to remain on hold, Powell's testimony will be a key window for investors to gauge the outlook for Fed policy. He not only needs to provide solid justification for the "wait-and-see" stance but must also address a series of sharp questions from bipartisan lawmakers regarding interest rates, the Middle East conflict, financial regulation, and the independence of the Fed.

Less than a week ago, Fed officials decided to keep interest rates unchanged for the fourth consecutive meeting. Reports indicate that Powell is expected to reiterate his cautious policy tone, emphasizing the need to observe more economic data before taking any action.

Additionally, the market expects Republican lawmakers to pressure Powell regarding the Fed's wait-and-see stance, demanding clear justification. At the same time, the internal divisions within the Fed regarding the impact of tariffs and interest rate policy will also be a focus, as two Fed governors, Waller and Bowman, previously indicated they might support a rate cut in July.

Interest Rate Policy Stance Under Challenge

Reports predict that Powell will maintain the core message he conveyed last week, that the Fed is currently "in a favorable position to wait and learn more about the potential direction of the economy before considering any interest rate changes." Powell stated last week:

We want to get more data; the economic situation remains robust, which gives us time to do so.

Although the tariff policies of the Trump administration have raised concerns about prices and employment, these effects have not yet fully materialized.

Economists predict that this week's data will show that the core inflation measure favored by the Fed may have risen by only 0.1% for the third consecutive month in May, marking the mildest three-month inflation performance since 2020. Powell himself acknowledged that the costs of tariffs will ultimately need to be absorbed, with part of it passed on to end consumers. James Egelhof, Chief U.S. Economist at BNP Paribas, commented:

Powell seems to believe there is no urgency to take a hard stance on the inflation path immediately; he appears to see the significant risk of making a wrong assessment.

However, the Fed is not entirely united. According to Wall Street Journal reports, both governors Waller and Bowman indicated that the impact of tariffs on prices may be temporary, and they might support a rate cut in July.

Assessment of Geopolitical Conflict Impact

Powell is almost certain to be asked about the potential economic impact of the ongoing conflict between Israel and Iran.

Last weekend, the U.S. directly joined the conflict by bombing Iranian nuclear facilities. On Monday, during the early Asia-Pacific trading session, WTI crude oil briefly surged above $78. However, as Iran took limited retaliatory actions against the U.S., investor concerns about supply risks eased. Crude oil plummeted 13% from its intraday high, with U.S. oil falling back to around $66According to a report from Wall Street Journal, Trump announced on Tuesday that Israel and Iran have fully agreed to a comprehensive ceasefire. Analysts pointed out that the rapid changes in the Middle East situation will make Powell cautious in his comments about the conflict and its potential consequences. Last week, when faced with reporters' questions, he stated:

Of course, we are watching what is happening, just like everyone else. We may see higher energy prices. Typically, when there is turmoil in the Middle East, you might see energy prices spike, but they often retreat. These things usually do not have a lasting impact on inflation.

Political Pressure and Independence Game

The report noted that Republican lawmakers are expected to pressure Powell to provide clear justification for his wait-and-see stance. However, not all Republicans will adopt a confrontational attitude like Trump.

Dan Meuser, a member of the House Financial Services Committee from Pennsylvania, stated on social media:

Chairman Powell deserves credit for navigating some of the toughest situations in modern history. But as inflation cools and the labor market remains strong, the benefits of rate cuts become hard to ignore.

At the same time, Powell may also receive support from Democrats, who may warn that the independence of the Federal Reserve is under threat from Republicans.

However, if other lawmakers follow the president's lead, Powell may face harsher criticism. Trump's recent attacks have focused on the costs of interest rates to the U.S. government, and he has increasingly resorted to personal attacks, calling the Federal Reserve chairman "one of the most stupid and destructive people in government."

According to information released by the Federal Reserve, Powell stated during a meeting with Trump in May that the decisions of the FOMC (Federal Open Market Committee) are based on "prudent, objective, and non-political analysis." He is expected to maintain this calm demeanor during the upcoming hearing. New York University economics professor Mark Gertler predicted:

He will remain completely calm.

Banking Regulatory Agenda

Federal Reserve observers will also have the opportunity to assess Powell's views on the ongoing key regulatory changes.

According to media reports, the White House is pushing a deregulation agenda, with several federal agencies working to relax rules. As part of this effort, Trump has nominated Bowman, who supports deregulation, for the top regulatory position at the Federal Reserve.

On Monday, Bowman stated that it is time to re-examine a key capital buffer regulation, which some regulators and bankers believe restricts lending institutions' trading in the $29 trillion Treasury market. The Federal Reserve and other regulators will propose lowering the so-called enhanced supplementary leverage ratio, a rule introduced in 2008 that requires banks to hold a certain amount of capital relative to their assets.

Additionally, Powell may need to respond to a recent proposal by Texas Republican Senator Ted Cruz, which would prohibit the Federal Reserve from paying interest on bank reserves. Cruz claims this move would save $1.1 trillion over ten years, but several analysts believe it would jeopardize the Federal Reserve's ability to control short-term interest ratesPaying interest on reserves effectively sets a lower limit for overnight market rates, which can effectively prevent banks from lending at rates below the Federal Reserve's target. Although Senate Banking Committee Chairman Tim Scott blocked the proposal from being attached to the tax and spending plan still under consideration by Congress, he did not completely dismiss the idea