Powell's first day of congressional testimony: reiterates a wait-and-see approach, does not rule out the possibility of an early rate cut, but June and July data are very important

On the first day of the "special" congressional hearing on the Federal Reserve's monetary policy, Federal Reserve Chairman Jerome Powell did not comment on the possibility of a rate cut at the next Fed meeting in July. He reiterated the need to see more data to assess how high tariffs would impact inflation, pointing out that the Fed has paused rate cuts so far due to expectations that tariffs would drive up inflation. However, he did not rule out the possibility that the impact of tariffs on inflation might not be as significant as expected, and he did not exclude the possibility of an earlier rate cut.

On Tuesday, June 24, Eastern Time, during the Q&A session of the House Financial Services Committee hearing, a congressman asked about the possibility of a rate cut in July mentioned by Fed Governor Christopher Waller last Friday. Powell stated, "Many paths are possible." He indicated that inflation might not be as strong as anticipated, and a decline in inflation along with a weak labor market could mean the Fed would cut rates earlier.

Powell later stated that data indicates that tariffs will impact American consumers in at least certain industries. He said, "We believe we should start seeing" the impact of tariffs on inflation in the June and July data. "If not, we will learn from it."

Powell expressed a "completely open" attitude toward the view that "the impact of tariffs on inflation will be lower." If the impact of tariffs on consumer prices is less than the Fed's expectations, it would have a substantial effect on the Fed's monetary policy.

Afterward, Powell reiterated that he expects tariffs to have a significant impact on prices during June, July, and August. If no impact is observed, it would provide a lesson. "We can only know by seeing it firsthand, but I believe we will learn as we go."

After Powell mentioned the possibility of an earlier rate cut and suggested that if the impact of tariffs on inflation is lower than expected, it would lead to a rate cut, U.S. stock markets saw a decline in Treasury yields towards the end of the morning session. The benchmark 10-year U.S. Treasury yield fell below 4.30%, and the two-year Treasury yield, which is more sensitive to interest rates, fell below 3.81%, both hitting their lowest levels in over a month after Powell's hearing. Analysts believe that Powell did not rule out the possibility of a rate cut in July during this hearing, and more importantly, he did not exclude the possibility that inflation might weaken.

"New Federal Reserve News Agency": Powell does not rule out the possibility of a rate cut in July but suggests it is more likely to wait until at least September

Journalist Nick Timiraos, known as the "New Federal Reserve News Agency," wrote that Powell's testimony at this hearing indicated to lawmakers that if it weren't for concerns that raising tariffs might undermine the Fed's years-long efforts to combat inflation, recent economic data would likely justify continuing rate cuts. Powell believes that brokerage activity is robust, allowing Fed officials to carefully analyze the data to determine whether to restart rate cuts.

The article stated:

"Powell did not explicitly rule out the possibility of a rate cut next month (July), but did not provide specific details. However, in response to lawmakers' questions, he hinted that Fed officials are more likely to wait until at least the September meeting to see whether the price increases driven by tariffs are lower than expected before resuming rate cutsThe article paraphrases Powell's words:

"If it turns out that inflationary pressures are indeed under control, we will lower interest rates as soon as possible, rather than later, but I do not want to point to a specific meeting."

Immediately following this statement, Powell said: "I think we don't need to rush because the economy is still strong."

The reason for not lowering interest rates is the forecast of rising inflation this year and the uncertainty brought by tariffs

During the hearing, a congressman asked about the changes in the Federal Reserve's monetary policy committee FOMC members' forecasts since March this year. Powell stated that the changes in their inflation expectations mainly stem from tariffs.

Powell indicated that the vast majority of FOMC members believe that lowering interest rates later this year is appropriate, but he pointed out that the economic outlook is "very uncertain."

A congressman mentioned the impact of tariffs from the Trump administration and asked whether the Federal Reserve officials had considered this in their assumptions. Powell stated that they try to publicly disclose their assumptions in speeches but do not comment on policy. Even if it is not explicitly stated in the quarterly updated economic outlook, officials discuss their assumptions in their speeches.

A congressman asked why the Federal Reserve cannot lower interest rates like other central banks. Powell replied that all professional forecasters outside the Federal Reserve expect inflation in the U.S. to rise this year, which is the reason the Fed has not taken action.

Subsequently, a congressman criticized that the Federal Reserve raised interest rates too late during Biden's presidency and lowered them too late after Trump took office. In response, Powell directly attributed the Fed's failure to lower rates so far to the uncertainty brought by tariffs.

Powell later mentioned that uncertainty is part of the reason the Federal Reserve is delaying interest rate cuts. He noted that uncertainty peaked in April and has since declined. He stated that the business community now "feels more positive."

In the prepared testimony released before the hearing, Powell pointed out that short-term inflation expectations have risen in recent months, with tariffs being a key driving factor, while most long-term inflation expectation indicators remain consistent with the Fed's 2% inflation target. The impact of tariffs on inflation may be temporary, but it could also be more persistent, depending on the effects of the tariffs.

In the long term, interest rate policy does not affect the supply and demand of the real estate market; interest rates are at a moderately restrictive level

A congressman asked whether the Federal Reserve's policy has restricted housing supply. Powell said that the Federal Reserve cannot influence the longer-term issue of housing supply shortages in the U.S. The long-term housing shortage exists, and the Fed has no power over it. The Fed's best course of action is to lower inflation, thereby allowing interest rates in related markets to decrease.

Powell pointed out that industries sensitive to interest rates, such as real estate, are indeed affected by Federal Reserve policies, but "this is part of restoring overall price stability." In the long run, the Fed's policies will not affect the supply and demand of housing.

Powell stated that inflation related to housing costs has always been very "sticky," but it has recently declined, which is "very good news." Inflation related to housing rentals is now decreasing quite regularly.

Powell believes that reducing housing inflation "just takes time." The impact of declining rents may take three to four years to reflect in price indicators.

A congressman later mentioned issues in the real estate market, stating that many homeowners seem to be "trapped" because they do not want to sell their homes due to low interest rates from a few years ago. Powell acknowledged that "people are indeed trapped." However, Powell reiterated that the Federal Reserve's primary responsibility is to continuously reduce the inflation rate to 2% and maintain it at that level over the long termPowell stated that current interest rates are at a modestly restrictive level, rather than a moderately restrictive level.

The rate cut in September last year was due to concerns about a significant rise in unemployment, and decisions will not consider political factors

A congressman asked about the debt issues arising from the Trump administration's massive tax cuts and spending plans, and whether this would weaken the United States' ability to respond to future economic downturns. Powell said that in that case, the Federal Reserve has significant room to cut rates.

Subsequently, Powell reiterated his view that the U.S. federal budget has been on an unsustainable path "for some time."

A congressman asked why the Federal Reserve cut rates by 50 basis points in September last year instead of 25 basis points. Powell said that at that time, the Federal Reserve was concerned about a significant rise in unemployment. Historical experience shows that a significant rise in unemployment is often associated with a higher risk of economic recession.

Powell stated that the decisions at that time "were all related to the labor market" and were not political. He pointed out that the Federal Reserve had been criticized for its slow monetary easing actions.

Powell told lawmakers that the Federal Reserve does not consider political factors when deciding on interest rates.

No signs of labor market weakness; can pause rate cuts if the economy is strong

A congressman asked why the Federal Reserve is not cutting rates now, given that today's indicators are similar to those in September last year. Powell again pointed out that there is a general expectation that tariffs will push up inflation. He also stated that there are currently no signs of weakness in the labor market. Given the strong economy, there is no need to rush to cut rates. "As long as the economy is strong, we can afford to pause (rate cuts) a bit."

When discussing the lack of rate cuts, Powell stated that the Federal Reserve is simply trying to be careful and cautious regarding inflation issues. He said, "It's just a matter of being prudent."

Powell reiterated that if the labor market weakens, the Federal Reserve will act more quickly. He said that if inflation is contained, the Federal Reserve can cut rates sooner rather than later. He does not want to imply that the Federal Reserve will decide to cut rates at a specific FOMC meeting.

If the labor market is strong and inflation rises, rate cuts will come later, not sooner

A congressman asked why the Federal Reserve's current interest rate setting contradicts the so-called "first-difference" rule. According to this rule, the Federal Reserve would adjust the benchmark interest rate based on recent changes in inflation and growth forecasts.

Powell pointed out that the first-difference rule currently indicates that the Federal Reserve should raise rates. The rule "may be a bit volatile." Other rules suggest that interest rates are close to the Federal Reserve's current level. He said that if the labor market remains strong and inflation rises, "I think we would still take rate-cutting measures, but it would be later rather than sooner."

At least some tariffs will be borne by consumers; price stability has not yet fully recovered

A congressman asked about the potential lag in the impact of tariffs on inflation. Powell stated that retailers often mention the existence of a lag. The Federal Reserve simply does not yet know how much of the tariff impact will be passed on to consumers.

A congressman asked whether consumers would bear the tariffs. Powell stated that initially, importers bear the cost of tariffs. However, over time, five different participants will bear the burden: manufacturers, exporters, retailers, and consumers. He indicated that data shows at least some tariffs will be borne by consumersWhen asked about the impact of tariffs on small businesses, Powell stated that small businesses typically import a single product, and these companies are affected more than others.

Powell said that the Federal Reserve "has not fully restored price stability." The Fed needs to act cautiously to prevent another inflation shock.

Commenting on Tariff Policy is Not the Fed's Responsibility

Some lawmakers urged Powell to comment on whether he believes Trump's tariff policy is "coherent." Powell repeatedly declined to comment.

Some lawmakers complained that the tariff policy is hurting the business community and demanded Powell to "give me an answer" regarding the tariff policy, asking "why are you avoiding the tariff struggle," and also questioned "are you afraid of Trump, why aren't you addressing this issue."

Powell responded, "To be honest, this is not our (Federal Reserve's) responsibility at all. We are not an institution that comments on or analyzes the President's decisions."

Economic Slowdown This Year; Immigration is One of the Reasons; AI May Replace a Large Number of Jobs

A lawmaker mentioned the Trump administration's policy of deporting illegal immigrants, arguing that this policy has caused "collateral damage" in sectors that urgently need workers, especially in agriculture, and asked what impact this policy has on the economy.

Powell replied that immigration is also an area that the Federal Reserve does not handle. He said that the Fed is "following the natural course" regarding changes in immigration policy, which has reduced labor growth, while the demand for workers is also declining.

Powell expects that the U.S. economy will slow down this year, with immigration issues being one of the reasons.

Powell stated that economists in the labor field indeed believe that in the coming years, the native-born population in the U.S. "is likely" to be unable to meet labor demand. Productivity may improve, thereby reducing the demand for workers, but "I wouldn't count on that."

Powell indicated that he does not expect AI technology to bring widespread productivity benefits. He believes that AI may take longer to promote productivity growth, or that the impact of AI is not as significant as people imagine. He said there is certainly a possibility that "AI will replace a large number of jobs."

When asked about the impact of AI, Powell pointed out that economists are analyzing its effects extensively. Currently, its impact is "unknown." He has heard some CEOs of companies say that they may lay off significantly due to AI, "but I think we are not aware of this."

U.S. Oil Industry Focuses More on Investment Returns; The "Shock Absorber" Viewpoint of Increasing Production with Rising Oil Prices is Questioned

A lawmaker asked about the risks of global energy price fluctuations, stating that oil prices could rise to $120 per barrel.

Powell said, "We will definitely feel that."

Powell stated that people's thinking about the concept of U.S. energy independence is evolving. A few years ago, there was a viewpoint that if energy prices soared, the U.S. would have a "natural shock absorber" because the domestic energy industry "would only increase production." This would avoid sustained oil price shocks similar to those in the 1970s.

Powell then said, "Now, that (viewpoint) is actually being questioned." He emphasized that after suffering from excessive investment, the U.S. energy industry is "more cautious and focuses more on investment returns." He referred to the oil industry downturn in the mid-2010sPowell said that if oil prices soar, the Federal Reserve will pay attention to the overall inflation situation.

Banks Can Freely Engage in Cryptocurrency Activities as Long as They Meet "Safety and Soundness" Standards

One of the Republican leaders in cryptocurrency legislation, Congressman Bryan Steil, asked about the Federal Reserve's decision to eliminate reputational risk in bank regulation.

Powell stated that the Fed recognizes that de-banking is a real issue that needs to be addressed. As long as they meet their own principles of "safety and soundness," banks can freely provide services to cryptocurrency companies and engage in cryptocurrency activities.

Powell noted that there has been a significant change in people's "attitudes" toward cryptocurrencies and expects more activity in this area. He mentioned that Congress is making good progress on the legislative process regarding the stablecoin framework draft.

Powell stated that the Federal Reserve does not have the authority to purchase Bitcoin and is not seeking congressional approval to do so.

The Dollar Remains the Top Safe-Haven Currency; April Treasury Volatility Has Not Affected It; Claims of Dollar Decline Are Premature and Exaggerated

When asked about the dollar's safe-haven status and overseas demand for U.S. Treasury bonds, Powell stated that the dollar's safe-haven status remains unchanged, and it is still the number one safe-haven currency.

He warned against prematurely claiming that this safe-haven status has changed, saying, "We need to be cautious about these suddenly emerging claims."

Regarding the dollar as a reserve currency, Powell stated that the Fed's responsibility is to maintain price stability in the long term. He indicated that the rule of law, price stability, and open capital markets are key to the dollar becoming the world's reserve currency.

A congressman asked whether he believes that the volatility in the U.S. Treasury market in April has not harmed the dollar's global standing. Powell agreed, stating that it has not harmed the dollar's global position.

Powell said that maintaining the dollar's dominant position "is not our formal responsibility," although it is a concern for the Federal Reserve. "We certainly do not want to undermine that." He pointed out that the Treasury plays a major role in dollar matters.

A congressman mentioned that the dollar declined during Trump's presidency and asked if we are currently in a period of dollar decline. Powell responded, "I wouldn't say that," adding, "The dollar remains the number one safe-haven currency. I think these claims about dollar decline are premature and somewhat exaggerated."

Easing SLR Will Encourage Banks to Participate in Treasury Trading

A congressman asked about the key regulatory metric for the banking industry, the Supplementary Leverage Ratio (SLR). Currently, the focus of easing financial regulation is on relaxing SLR rules.

Powell stated that when the SLR is binding, it does hinder banks from participating in activities such as Treasury trading, "it prevents banks from engaging in low-profit, relatively safe activities, such as acting as intermediaries in the Treasury market." He indicated that relaxing this measure should encourage more banks to participate. However, Powell did not provide a numerical estimate of how significant this impact would be.

When faced with the SLR issue again, Powell said, "I have always believed that if we have a leverage ratio as a backstop rather than a binding constraint, it would be better," as the latter weakens banks' willingness to hold U.S. TreasuriesThe Federal Reserve and other banking regulatory agencies are expected to announce a plan this week to lower the so-called "Enhanced Supplementary Leverage Ratio (eSLR)," a rule that requires banks to hold a certain percentage of capital based on their asset size.

CRE Situation Improving, Private Credit Worth Monitoring Closely

A lawmaker asked about banking regulation issues. Powell responded that Federal Reserve Vice Chair for Supervision Michelle Bowman is pushing for more reforms.

A lawmaker inquired about the order of changes to bank capital requirements. Powell stated that this will be determined by Bowman.

When discussing risks to financial stability, Powell noted, "There are many risks that need to be monitored to prevent them from spiraling out of control." He pointed out that one of these is commercial real estate (CRE).

Powell speculated that in the current environment, banks may be "risk-averse." While current asset prices are high, the leverage of banks, households, and businesses is not that high.

Powell mentioned that the issues with CRE have existed for five years, and the Federal Reserve is working to address this problem, making good progress, with the situation improving and not worsening.

Powell believes that overall, there is no need to worry about financial stability. The private credit market has been growing rapidly and has not yet experienced a "real recession," making this area worth "close monitoring" by regulators. Credit conditions for small businesses are slightly tighter.

Trump's Threats Have No Effect on the Fed's Functioning; Lack of Independence Could Harm the Fed's Credibility in Controlling Inflation

A lawmaker asked whether there are concerns that the Trump administration's cuts to the budget and staff of the U.S. Bureau of Labor Statistics would affect economic data statistics. Powell stated that there has been "some regression" in this area, and understanding economic conditions is "very important." He also mentioned that investing in data is a good investment.

A lawmaker asked how Trump's threats affect the Fed's personnel in fulfilling government duties. Powell said, "These threats have no effect. We are fulfilling our responsibilities."

A lawmaker asked whether the U.S. president could appoint himself as the Fed chair. This question was clearly in response to Trump's public criticism of the Fed for not lowering interest rates last week, jokingly asking, "Can I appoint myself as Fed chair? I would do a much better job than these people."

In response to the above questions, Powell stated, "I don't know," adding that this "is not my issue. I won't speculate."

A lawmaker emphasized the importance of the Fed's independence and asked Powell what his biggest concern would be if his successor, the next Fed chair, could not maintain independence.

Powell stated that the Fed's credibility in price stability is crucial. If this credibility is lost, long-term interest rates will rise, and maintaining this credibility will come at a "high cost."

Powell revealed that he has privately heard some lawmakers express that the Fed's decision to keep interest rates unchanged is correct.

Powell indicated that if the Fed ventures into areas outside its responsibilities, its independence would face significant risks. "I agree that climate issues are among the biggest risks."

Powell acknowledged that climate issues are an important topic that government officials should consider but pointed out that in the past, the Fed has not played any role in climate policy. He stated that the Fed is considering rescinding previous regulatory guidance for banks to consider climate risksSome lawmakers mentioned that the Republican Party proposed a measure that would set the salary cap for the Federal Reserve at 70% of the salaries of non-monetary department employees of the Federal Deposit Insurance Corporation (FDIC). Powell stated that such a proposal would make it more difficult to attract and retain employees and would break the "moat" that has allowed the Federal Reserve to manage its own affairs for 90 years. He said that salary cuts would complicate the Federal Reserve's ability to control its workforce size.

Balance Sheet Reduction Can Be Maintained for Quite Some Time at Current Pace

Regarding the reduction of the balance sheet, Powell stated that the Federal Reserve is on track with the balance sheet reduction. The Fed still has room for balance sheet reduction and can "maintain it for quite some time" at the current pace.

Powell noted, "We still have some work to do on the balance sheet," but he believes that the size of the Federal Reserve's balance sheet will not fall back to $4 trillion.

Commentary pointed out that due to super-easy monetary policy, the size of the Federal Reserve's balance sheet peaked at $9 trillion in 2022, and the current size is $6.7 trillion, which is higher than the approximately $4.2 trillion before the COVID-19 pandemic.

Powell stated that the Federal Reserve aims to maintain a sufficient reserves framework to ensure adequate liquidity.

A lawmaker asked about the impact of balance sheet reduction on mortgage-backed securities (MBS) in the market. Powell believes the impact is minimal.

If the Issue of Unsustainable Debt Growth Is Delayed Too Long, the Consequences Will Be More Severe

Powell reiterated his view at the hearing that for "some time," the U.S. federal government's budget and debt growth have been on an unsustainable path. He did not comment further on fiscal policy.

Subsequently, a lawmaker asked where the critical point is for U.S. debt to reach a point of no return. Powell stated that there is currently no conclusion. Commentary noted that U.S. Treasury Secretary Janet Yellen previously expressed a similar view. She stated last month at a House hearing that it is difficult to predict when the market will "push back."

A lawmaker asked what impact the unsustainable U.S. debt would have on the economy.

Powell stated that this would lead to rising long-term interest rates, and Congress would ultimately have to take action to control the deficit. "If we wait too long to address the debt issue, the consequences will be more severe."

Not Speculating on the Economic Impact of the Israel-Iran Conflict; Sufficient Resources Prepared to Address Cybersecurity Threats Related to Iran

Powell said he does not want to speculate on the economic impact of the conflict between Israel and Iran.

A lawmaker asked about the potential threat of Iranian cybersecurity to the U.S. financial system. Powell stated that the Federal Reserve is urging banks to remain vigilant, and the Fed itself is also staying alert. "In the field of cybersecurity, you can never rest on your laurels."

Powell stated that the Federal Reserve believes it has sufficient resources to prepare for cybersecurity threats.

A lawmaker asked about former President Trump's criticism of Powell. He focuses on serving the public. "Do what you think is right and bear the consequences."

Powell told lawmakers that focusing on anything outside of the economy would be a distraction. "What I care about is serving the American people."