Powell Signals Caution, But July Rate Cuts Possible

Federal Reserve Chair Jerome Powell appeared before Congress for a monetary policy hearing, once again demonstrating his well-known “balancing act,” addressing both sides of the inflation debate.

To start, Powell cited the uncertainty caused by tariffs, stating they are expected to significantly impact prices between June and August. He acknowledged that recent economic data supports the case for a rate cut, but emphasized that these data points are backward-looking. Many economists, he noted, anticipate that tariffs will lead to a “meaningful increase” in inflation this year. “We can’t just ignore that,” Powell said.

When one senator argued that tariffs typically cause only a one-off price increase without long-term inflation pressure, Powell responded that the Fed would weigh the impact of tariffs and would not rush policy adjustments until they had more clarity on the effects of this round of tariffs.

However, Powell later pivoted slightly, hinting at the possibility of an earlier rate cut. He said, “If it turns out that inflation pressures do remain contained, then we will get to a place where we cut rates, sooner rather than later.” He added that if the labor market weakens and inflation remains controlled, the Fed would prefer to act sooner.

Still, Powell maintained a cautious tone: “I wouldn’t want to point to a particular meeting,” he said. “I don’t think we need to be in any rush because the economy is still strong.” He added that the current rate level is “modestly” restrictive—not just “moderately”—signaling some degree of policy restraint.

Markets interpreted Powell’s comments as slightly dovish. While he did not rule out a rate cut in July, the more notable takeaway was his suggestion that inflation might continue to ease. Nick Timiraos of the Wall Street Journal, often called the “Fed whisperer,” commented that while recent data supports a continued easing path, the Fed is holding back due to concerns that tariffs could undo years of progress on inflation.

Following Powell’s testimony, markets priced in less than a 20% chance of a July cut, with September remaining the consensus bet.

Notably, other Fed officials showed differing views on whether to cut rates in July. Doves appear to have a slight edge.

Chicago Fed President Austan Goolsbee (a voting member this year) noted that the past three months of inflation data show minimal pressure. If tariffs don’t elevate inflation, he supports continuing forward with cuts.

Vice Chair for Supervision and Fed Governor Christopher Waller (both with voting rights) also expressed concerns about labor market weakness outweighing inflation rebound risks, potentially supporting a July cut.

Atlanta Fed President Raphael Bostic (non-voting this year) stated that the Fed currently doesn’t need to cut rates and expects only one rate cut before the end of 2025. He projects U.S. growth to slow to 1.1% this year, with inflation returning to around 3% by year-end.