Powell’s Humphrey-Hawkins Testimony Preview: Key Themes to Watch

Federal Reserve Chair Jerome Powell is set to testify before Congress this week in the semi-annual Humphrey-Hawkins testimony, with appearances before the Senate on Tuesday and the House on Wednesday. His remarks come at a pivotal time for the markets, with key inflation data, including the Consumer Price Index (CPI) report, scheduled for release on Wednesday. Investors will closely analyze Powell’s comments for any signals on the Fed’s future monetary policy path, particularly as the 10-year Treasury yield hovers around 4.50%, a level that could have significant implications for equity markets.

Inflation: Progress but Challenges Remain

Powell has emphasized in recent speeches that inflation has moved closer to the Fed’s 2% target but remains somewhat elevated. The latest Personal Consumption Expenditures (PCE) price index showed a 2.6% year-over-year increase, while core PCE, which strips out food and energy, rose 2.8%. Powell has expressed optimism over recent inflation readings but has cautioned that progress has been uneven, particularly in core services.

“Inflation has moved much closer to our 2 percent longer-run goal, though it remains somewhat elevated.”

Given that Powell has emphasized the need for sustained inflation improvement before further rate cuts, his testimony will likely reinforce the Fed’s data-dependent approach. Any signals about whether recent inflation trends are enough to justify further rate cuts in the coming months will be a critical focus for markets.

Monetary Policy: No Rush to Cut Rates Further

The Federal Reserve has already lowered interest rates by 100 basis points since September 2024, bringing the federal funds rate to a range of 4.25%–4.50%. Powell has described this recalibration as appropriate, given the progress on inflation and the labor market’s resilience. However, he has also emphasized that the Fed is in no hurry to cut rates further.

“With our policy stance significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance.”

A March rate cut remains on the table, but Powell has made it clear that additional reductions will depend on incoming data. Financial conditions have tightened, with long-term yields rising, even as short-term rates have declined. Investors will be looking for any changes in Powell’s tone regarding the potential timing and extent of future rate cuts.

Tariffs and Fiscal Policy: Growing Uncertainty

One of the key unknowns for the Fed’s outlook is the impact of new trade policies and tariffs. Powell has acknowledged that uncertainty surrounding tariffs, fiscal policy, and regulation could affect business investment and inflation expectations. The market has recently been grappling with reports of potential new tariffs on steel, aluminum, and other imports, which could introduce inflationary pressures if implemented broadly.

“We don’t know what will happen with tariffs, with immigration, with fiscal policy, and with regulatory policy.”

Powell is unlikely to take a strong stance on fiscal policy, but his remarks may hint at whether the Fed sees tariff risks as a reason to delay rate cuts or, conversely, if concerns about growth would justify a more accommodative stance.

Balance Sheet Reduction: Still on Track

The Fed has continued to reduce its balance sheet, which has declined by $2 trillion since the start of quantitative tightening. Powell has stated that the Fed will slow or halt balance sheet reductions when reserves reach a level sufficient for effective monetary policy.

“We intend to reduce the size of our balance sheet to a level that’s consistent with implementing monetary policy efficiently and effectively.”

While Powell has reassured markets that the process remains orderly, any indication of adjustments to the balance sheet reduction timeline could impact financial conditions and Treasury yields.

Economic Outlook: Resilient but Risks Remain

The U.S. economy has remained strong, with GDP growth exceeding 2% in 2024 and steady labor market conditions. Powell noted that job growth has averaged 170,000 per month, and the unemployment rate has stabilized at 4.1%. However, he acknowledged that low-income households are still feeling the effects of high prices.

“The labor market is not a source of significant inflationary pressures.”

One major question for markets is whether Powell sees greater downside risks to the economy, which could accelerate the Fed’s rate-cut timeline, or if he maintains confidence in the current economic trajectory.

Market Implications: Yields in Focus

With 10-year Treasury yields hovering around 4.50%, Powell’s comments could trigger significant market movements. If he signals that rate cuts are still some time away, yields could rise further, pressuring equities, particularly growth stocks. Conversely, any hint of a more dovish stance could push yields lower, providing relief to risk assets.

Given the timing of Powell’s testimony ahead of Wednesday’s CPI release, his remarks could serve as a market-moving catalyst, reinforcing or countering expectations about the Fed’s next steps.

Conclusion

Powell’s Humphrey-Hawkins testimony arrives at a crucial moment for markets, with inflation, monetary policy, and trade policy uncertainty all in focus. His recent comments suggest that the Fed is taking a cautious, data-driven approach, with no rush to cut rates unless inflation shows sustained progress toward 2%.

Investors will be closely watching whether Powell signals any shift in the Fed’s stance on rate cuts, tariffs, or balance sheet policy. With Treasury yields at a key level and a CPI report looming, Powell’s testimony could have significant implications for both the bond and equity markets in the days ahead.