Federal Reserve Chair Jerome Powell told Congress that higher tariffs enacted this year are likely to feed through into consumer prices by mid-summer, delaying any rush to lower borrowing costs. He emphasized that the Fed must wait for clear evidence of tariff-driven inflation before entertaining rate cuts, despite pressure from President Trump and some colleagues to act sooner.
Powell highlighted the U.S. labor market’s resilience and the central bank’s mandate to keep inflation under control, warning that premature easing could jeopardize price stability. He explicitly ruled out opening the door to a rate cut at the Fed’s July meeting, insisting that policymakers are “in no rush” and will let incoming data guide their decisions.
Market Overview:- Fed holds benchmark rate at 4.25%–4.50%, signaling patience.
- Tariff-induced price gains expected to show up in June and July inflation reports.
- Policymakers still see two quarter-point cuts in 2025, but none imminent.
- Powell refuses to tie rate decisions to specific meeting dates.
- Fed maintains neutrality on trade policy, focusing solely on inflation impacts.
- Professional forecasters anticipate a meaningful uptick in inflation this year.
- Investors will watch June and July CPI prints for tariff pass-through.
- Fed communications blackout begins June 7, limiting public guidance.
- Markets now price first cut in September, contingent on inflation data.
- The Federal Reserve’s patient, data-driven approach reassures markets that policy decisions will be carefully considered, reducing the risk of premature or destabilizing rate moves.
- Powell’s focus on waiting for clear evidence of tariff-driven inflation helps anchor inflation expectations, supporting long-term price stability and market confidence.
- With the labor market resilient and the economy still solid, the Fed has flexibility to respond to changing conditions without being forced into hasty decisions by political pressure.
- Investors can expect a more predictable policy environment, with the Fed signaling openness to rate cuts later in the year if inflation data supports such a move—boosting confidence in risk assets.
- By maintaining neutrality on trade policy and focusing solely on inflation impacts, the Fed preserves its independence and credibility, which is positive for market stability.
- Markets now price the first rate cut for September, aligning with the Fed’s cautious outlook and reducing the risk of disruptive surprises.
- Powell’s insistence on waiting for tariff effects to show up in inflation data means that any rate relief could be delayed, potentially prolonging higher borrowing costs for consumers and businesses.
- If tariff-driven price increases prove persistent rather than transitory, the Fed may be forced to keep rates higher for longer, weighing on economic growth and market sentiment.
- Ongoing uncertainty over tariff negotiations and their impact on inflation creates a murky outlook for investors, who may remain cautious and risk-averse until clarity emerges.
- Political pressure from the White House for rate cuts could undermine Fed independence and fuel market volatility if policymakers appear to be influenced by external demands.
- With the Fed communications blackout beginning soon, public guidance will be limited, potentially increasing uncertainty and speculation about future policy moves.
- If inflation data in June and July show significant tariff pass-through, the risk of a policy mistake—either cutting rates too soon or delaying too long—could grow, threatening both price stability and economic growth.
In his prepared testimony, Powell noted that tariff-driven price rises could be transitory or persistent, and the Fed stands ready to adjust its stance once the effects become clearer. Investors responded by scaling back expectations for a July rate cut and boosting odds for easing in September.
Despite calls from the White House for steep and immediate rate reductions, Powell made clear that monetary policy would not endorse or criticize trade decisions, but would react only to their inflationary consequences. He reaffirmed that ongoing uncertainty over tariff negotiations justifies a wait-and-see approach.
