Federal Reserve Chair Jerome Powell stated the central bank needs more time to assess if escalating tariffs will drive inflation before considering the interest rate cuts that President Donald Trump is advocating for.
Powell mentioned that the tariff increases this year are expected to raise prices and have a negative impact on economic activity.
Driving the news: There is uncertainty regarding the duration of the inflationary effects of tariffs, making it crucial for the Fed to gather more information on the economy’s likely path before making any policy adjustments.
The big picture: After Powell’s testimony, investors adjusted their expectations of the central bank potentially cutting interest rates at the July meeting and increased the likelihood of rate reductions in September and later in the year.
- The release of Powell’s testimony aligns with the recent Fed policy statement in which officials voted to maintain the benchmark interest rate within the current range of 4.25% to 4.5% and did not suggest imminent rate cuts.
- Economic projections revealed that Fed officials on average anticipate two quarter-point rate cuts by the end of the year, consistent with current market expectations.
- While Trump-appointed Fed governors believe rate cuts might be necessary as soon as July due to lack of inflation response to tariffs, two reserve bank presidents are concerned about potential inflation intensification.
Go deeper: President Trump has repeatedly urged for substantial rate cuts, expressing a desire for rates to be two to three percentage points lower, and criticizing Powell for his stance on interest rates.
