Federal Reserve chairman Jerome Powell testified before the Senate Banking Committee on February 11, 2025, to provide the semiannual Monetary Policy Report. In giving evidence, Powell highlighted the seriousness with which the Federal Reserve is committed to fulfilling its dual mandates of maximum employment and price stability and the robustness of the US economy. He has also illustrated to us the precariously tight nature of the labour market, including one of the lowest "unemployment" rates imaginable, as well as the fact that inflation is at or close to the Fed's target of 2% of the Fed Funds Rate. Despite all of these positive signs, however, Powell spoke with a dovish stance, elucidating that there is no immediacy to adjust interest rates. He emphasized the importance of tolerance, pointing out that the central bank is willing to maintain current policy to see inflation move down toward the target for a while longer. The virtue of this approach lies best in consistency with the Federal Reserve's "discourage for the long run" approach, and even more so, in the circumstance of present economic and financial instability.
A major contributor to this uncertainty is the reinstatement of new steel and aluminum imported tariffs by the Trump administration. Currently, these 25% tariffs are predicted to have inflationary effect. Therefore, core inflation is likely to be greater than 3.5%, which may impact the key inflation measures of the Fed. Powell also acknowledged the potential inflationary effects of the tariffs, but noted that they have so far their full effects are nonetheless unclear. He further stressed that while free trade is "mother nature" it lay out of the reach of the Fed's mandate of prescribing tariff rates. In contrast, the charge on the Federal Reserve to act wisely with respect to the consequences on the economy of trade policies is that way.
In the prepared remarks, Powell also noted that the economy is stable today, and there is no urgent need for their cuts to interest rates anymore. He further highlighted that the labor market has subsided, in that the unemployment rate went down from 4 etc.2% in July 2024 to 4 etc.0% at the moment. Powell emphasized the Federal Reserve's adherence to objectives of progress on inflation toward the 2% target, raised a possibility of lowering the rate in expectation of an unfortunate economic retrenchment, and hinted at a duration of rate reductions in case of an unanticipated economic weakness, and/or premature progress of inflation, respectively. He also considered the possible policy impact of the Trump Administration (e.g., extreme tariffs), and its implications for economic forecasting.
The financial markets responded cautiously to Powell's testimony. The yield on U.S. government debt 10 years maturating rose for the fourth consecutive period, in line with investor expectation that the Fed would keep rates flat concerning the target rate of the Fed funds rate. After the words of Powell the S&P 500 did not move much since the market was still tense_ before some of the key economic data was released, like the reading of the Consumer Price Index (CPI).
Powell also addressed questions on the independence of the Federal Reserve and how it should interact with the other federal agencies. He told the Senate Banking Committee that barring strange behavior, there is no reason to believe that anyone associated with the venture of Elon Musk or the team of Department of Government Efficiency is trying to work the Fed's secure payment system. This guarantee is happening in the background of the team of Musk staff, who are employed in the Treasury Department, to get access to the federal payments system, which is responsible for $6 trillion in U.S. government disbursements per year.
Powell's appearance before the House Financial Services Committee has been slotted in. At the second session hearing, it will undoubtedly play a pivotal role in how the Fed policies will chart the future direction of the Federal Reserve, and how much freedom the Federal Reserve will have from economic policy. Investors hope for a possible rate cut in June but are not confident for a rate cut in the near future. It is through Powell's testimony that it is possible to gain further insight into the thinking of the Federal Reserve regarding its actions to this day, considering the balance between the goals of maximizing employment and price stability that are aspects of an inherently complex and dynamic economic life.
Broadly, Powell's statement highlights the Federal Reserve stat's cautious, prudent approach to monetary policy within this volatile economic context. It is business as usual, that both the central bank pays close attention to the dual mandate and carefully monitors economic activity and external factors (trade policy, etc. and take those variables into account in decisions about interest rates and other policy tools.
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