Powell to outline Fed’s rate cut path in testimony before US Congress
- Jerome Powell’s testimony in the US Congress will be a top-tier market-moving event this week.
- New clues on the Federal Reserve interest rate path are awaited.
- US Dollar, stock markets and other asset classes could see big swings with the Fed Chair’s words.
Jerome Powell, Chairman of the United States (US) Federal Reserve (Fed), will deliver the Semi-Annual Monetary Policy Report and testify before the US House Financial Services Committee on Tuesday. The hearing will start at 14:00 GMT and it will have the full attention of all financial market players.
Jerome Powell is expected to address the main takeaways of the Fed’s Semi-Annual Federal Reserve Monetary Policy Report, published last Friday. In that report, the Fed noted that there are some early signs suggesting that tariffs are pushing up inflation and reiterated that monetary policy is well-positioned for what lies ahead.
In a long Q&A session, House members are expected to ask Powell about the interest rate path, inflation developments, and the economic outlook. They are also very likely to inquire about how US President Donald Trump’s policies and the current geopolitical environment could influence prices, growth prospects and the monetary policy moving forward.
The CME FedWatch Tool shows that markets are currently pricing in about a 20% probability that the Fed will lower the policy rate by 25 basis points (bps) in July after maintaining its status quo at every meeting this year. The revised Summary of Economic Projections (SEP), published alongside the policy statement after the June meeting, showed that policymakers are still projecting two 25 basis points (bps) rate cuts in 2025 and a single rate cut in 2026, compared to two rate cuts marked down in March’s SEP.
In an interview with CNBC this past Friday, Fed Governor Christopher Waller said that the Fed is in a position to lower rates as early as July. Citing concerning signs in the labor market, such as a high unemployment rate among recent graduates and slower job creation, Waller argued that the Fed should not wait for the job market to crash before easing policy. Similarly, Fed Governor Michelle Bowman noted that she would be in favour of lowering the interest rate at the next meeting to align the policy more closely with its neutral setting and maintain a healthy labour market.
In case Powell notes that they will not have enough data to confirm a rate cut in July and reiterates that they need to remain patient, the market positioning suggests that the US Dollar (USD) could gather strength against its rivals in the immediate reaction. On the flip side, a significant USD selloff could be seen if Powell leaves the door open for a policy-easing step in July. Comments on the inflation outlook, especially with rising energy prices due to the escalating geopolitical tensions in the Middle East, could also drive the USD’s valuation.
About Jerome Powell (via Federalreserve.gov)
"Jerome H. Powell first took office as Chair of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term. He was reappointed to the office and sworn in for a second four-year term on May 23, 2022. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028."
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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