The day after Powell's congressional hearing: Tariffs are unprecedented, and their impact on inflation is uncertain

Written by: Li Dan, Wall Street Journal

The day after the "special" congressional hearing on the Federal Reserve's monetary policy, Fed Chairman Jerome Powell once again mentioned the prospect of interest rate cuts. He reiterated that there is no rush to cut rates, emphasizing that high tariffs bring significant uncertainty, pointing out that the U.S. economy is very strong, and that there is reason to act slowly in uncertain circumstances, while also mentioning some factors that could drive rate cuts.

During the hearing of the U.S. Senate Committee on Banking, Housing, and Urban Affairs held on Wednesday, June 25, Powell told lawmakers that future trade agreements might allow the Fed to consider cutting rates.

Regarding the Trump administration's policies, Powell stated that the economic outlook (SEP) update released by the Fed after last week's meeting reflects, to some extent, the impact of trade policies. However, the tariffs are very high, and such high tariffs have no precedent, making it difficult to predict how tariffs will affect inflation. In times of uncertainty, it is reasonable to advance monetary policy more slowly.

On inflation, Powell stated that stagflation is not a fundamental assumption of the U.S. economy, but the Fed is monitoring prices in the U.S. Over time, regulation may also lead to a slowdown in inflation.

Current High Tariffs Have No Modern Precedent; Their Impact on Inflation Will Emerge in the Coming Months

Powell stated during his testimony that due to the lack of historical experience, it is difficult for Fed officials to assess the potential impact of the Trump administration's trade policies. "There is a lack of modern experience in this regard. The scale of tariffs during President Trump's first term was only one-sixth of what it is now."

It is precisely because of the lack of precedent that the Fed currently feels uncertain about making any policy adjustments. Powell said:

"This is challenging, one reason being that there is no modern precedent, and we must remain humble in our estimates. The impact of inflation transmission may be larger or smaller than we imagine, which is why we are not in a hurry to act."

Powell stated that the Fed is waiting to see who will ultimately bear most of the tariffs and how the tariffs will be reflected in measured inflation.

Powell believes that the Trump administration's tariff measures may push inflation higher in the coming months.

Powell said that a reasonable expectation is that tariffs will cause a certain degree of inflation. He indicated that most Fed officials support cutting rates this year, while the Fed wants to observe changes in inflation over the next few months.

"Tariffs will bring some inflation. There is none currently, but it will emerge in the coming months."

Consumers May Bear Some of the Tariffs; Difficult to Predict in Advance; Fed Still Working to Determine Impact; Waiting for More Data

During a hearing in the House of Representatives on Tuesday, Powell stated that data shows at least some of the tariffs will be borne by consumers. At that time, he said that initially, importers would bear the cost of the tariffs. However, over time, five different participants will bear the burden: manufacturers, exporters, retailers, and consumers.

On Wednesday, Powell reiterated that the Fed is still working to determine the impact of tariffs on consumer prices. He said:

"The question is, who will pay for these tariffs? How much of it will be reflected in inflation? To be honest, it is difficult to predict in advance."

Powell believes that consumers may need to bear some of the costs of import tariffs. He pointed out that tariffs could cause losses of hundreds of billions of dollars each year, "of which part will be borne by consumers. We are just waiting for more relevant data."

Some Republican senators criticized Powell, characterizing tariffs as potential drivers of inflation. Among them, Senator Pete Ricketts believes that tariffs may only cause a one-time increase in prices and will not exacerbate inflation.

Another senator, Bernie Moreno, accused Powell of political bias, saying, "You should consider whether you are looking at this from a fiscal or political perspective because you just don't like tariffs." Powell did not respond.

However, Powell reiterated that most Fed officials do indeed support cutting rates this year. He added that tariffs may not significantly push up inflation.

During Tuesday's House hearing, Powell mentioned that the impact of tariffs on inflation might be less than expected. When asked about the possibility of a rate cut in July, Powell said that "many paths are possible," and that inflation might not be as strong as expected, with declining inflation and a weak labor market possibly indicating an earlier rate cut.

Rarely Touching on Fiscal Issues: Congress Seems to Need to Consider Student Loan Debt

Powell has previously stated that the U.S. government's fiscal path is unsustainable when describing the federal deficit. He has said that the growth of U.S. debt exceeds the growth of the economy, making it unsustainable. In this hearing, Powell again mentioned government debt.

Powell stated that the Federal Open Market Committee (FOMC) does not consider the U.S. federal government's debt issues in its monetary policy decisions. Fiscal policy can exacerbate inflationary pressures, but the Fed will not comment on such risks. The scale of U.S. debt has not affected the Fed's ability to fulfill its responsibilities.

Powell typically avoids commenting on fiscal policy. However, during Wednesday's hearing, he made a rare "exception" when discussing student loans.

Powell stated that student loan debt "seems to be an issue that Congress needs to consider." Such debt negatively impacts borrowers' ability to fully participate in economic activities, thereby dragging down the overall economy.

Powell said, "You can make various investments, and if you cannot repay the loan, you can discharge it through bankruptcy. The only exception is student loans. I want to ask if this is a wise national policy. Those who borrow money to invest in education, we do not discharge (repayment)."

U.S. Bond Market Operating Well; Liquidity Appropriate; Dollar Remains Global Reserve Currency

Speaking about the U.S. bond market, Powell stated that the bond market is performing well, functioning normally, and operating smoothly, with appropriate liquidity.

Powell believes that the dollar remains the global reserve currency. He does not hold an opinion on whether the dollar is overvalued but mentioned that some believe the dollar is overvalued.

During Tuesday's House hearing, Powell defended the dollar's global status, stating that the dollar remains the top safe-haven currency, and the volatility in the U.S. Treasury market in April did not undermine the dollar's position.

The Proposal to Eliminate Interest Payments on Reserves Will Not Save Banks Money

Powell stated that even if the mechanism for paying interest on reserves deposited at the Fed is eliminated, it will not save banks money, and restoring a scarce reserve system would be challenging and could trigger market volatility.

Powell mentioned the proposal to eliminate the interest payment mechanism on bank reserves, stating, "People fantasize that doing so will save money, but that is not the case." "If we want to return to the era of scarce reserves, it will be a long, bumpy, and turbulent road. I do not recommend that we go down this path. Ample reserves mean ample liquidity, which means banks can continue to lend."

The U.S. Congress approved the aforementioned mechanism before 2006, and the Fed began paying interest on reserves held by commercial banks. Subsequently, one of the policy rates used by the Fed to control short-term rates—the Excess Reserves Balance (IORB), also known as the Reserve Balance Rate—was established, with the IORB serving as the upper limit of the Fed's interest rate corridor, while the Overnight Reverse Repo Rate (ON RRP) serves as the lower limit.

Reports on the Fed Headquarters Renovation Costing $2.5 Billion Are Highly Provocative

In recent months, media reports have indicated that the renovation of the Fed's headquarters building, Marriner S. Eccles, in Washington, D.C., is expected to cost around $2.5 billion. As a result, the Fed faces pressure from external criticism. Elon Musk, who previously led the Office of Government Efficiency (DOGE), specifically mentioned this project, stating, "We should absolutely look into whether the Fed spent $2.5 billion hiring interior designers. It's truly shocking."

During Wednesday's hearing, a lawmaker questioned the renovation plan, to which Powell responded that the Fed "takes its responsibility as a steward of public funds seriously, and no one wants to renovate a historic building." He also stated that the headquarters building is neither safe nor waterproof and needs renovation, a matter that can be left to successors.

According to media reports, the early planning for the Marriner S. Eccles building included a rooftop garden, water features, and an upgraded executive dining room. Powell stated during Wednesday's hearing that these reports are inaccurate and highly provocative.

Powell said, "All the provocative content reported by the media is not part of the current plan. There is no VIP dining room, no new marble, no dedicated elevators. No new water features, no beehives, and no rooftop terrace garden."