Introduction to Jerome Powell’s Testimony
Federal Reserve Chair Jerome Powell recently testified before the House Financial Services Committee, providing insights into the central bank’s stance on monetary policy. In his prepared remarks, Powell emphasized that the Fed remains in a wait-and-see mode due to lingering uncertainty about the impacts of higher tariffs.
The Impact of Tariffs on Monetary Policy
Powell explained that the effects of tariffs on inflation could be short-lived, reflecting a one-time shift in the price level. However, it is also possible that the inflationary effects could be more persistent. The Fed chair noted that avoiding a persistent inflation outcome depends on the size of the tariff effects, how long it takes for them to pass through fully into prices, and ultimately, on keeping longer-term inflation expectations well anchored.
The Fed’s Current Policy Stance
The Fed’s monetary policy report, released last week, summarized the major economic and financial developments of the year to date. The report reviewed the Fed’s policy actions, which have largely consisted of holding the target interest rate range between 4.25% and 4.5%, and slowing the pace of its balance sheet runoff. Powell’s appearance before the committee comes as President Donald Trump and others in his political orbit have continued to criticize the Fed for keeping interest rates unchanged.
Criticism from President Trump
In a recent post, Trump argued that the federal funds rate should be "at least two to three points lower" than where it is today. He claimed that such a lower rate would save the country roughly $800 billion per year, presumably referring to government interest payments on existing debt. However, Powell remains committed to ensuring that the Fed’s policies support maximum employment and price stability.
The Fed’s Duty to Prevent Persistent Inflation
Powell emphasized that restrictive trade policies will eventually lead to higher prices, and it is the Fed’s duty to ensure that a jump in prices does not lead to persistent inflation. The Fed chair noted that the central bank’s obligation is to keep longer-term inflation expectations well anchored and to prevent a one-time increase in the price level from becoming an ongoing inflation problem.
Balancing Maximum Employment and Price Stability
As the Fed acts to meet its obligation, Powell said that the central bank will balance its maximum-employment and price-stability mandates. He emphasized that without price stability, the Fed cannot achieve the long periods of strong labor market conditions that benefit all Americans.
Conclusion
In conclusion, Jerome Powell’s testimony highlights the Fed’s cautious approach to monetary policy in the face of ongoing uncertainty. Despite criticism from President Trump, the Fed remains committed to its dual mandate of maximum employment and price stability. As the central bank navigates the complex economic landscape, it will continue to monitor the effects of tariffs and adjust its policies accordingly to support the long-term health of the US economy.
