By Howard Schneider
WASHINGTON (Reuters) -U.S. Federal Reserve Chair Jerome Powell, in his first appearance before Congress since the inauguration, vouched for the strength of the economy President Donald Trump inherited even as he deferred on questions about tariffs, Elon Musk’s role in government, bank account safety, and other issues reflecting the unsettled nature of the administration’s first weeks.
Powell’s twice-a-year trips to Capitol Hill often go far beyond the ostensible purpose of discussing the state of the economy and monetary policy – issues where the Fed chair had much to say, almost all of it good given a 4% unemployment rate, inflation nearing the Fed’s 2% target, and ongoing growth.
“We are in a pretty good place with this economy,” Powell said, noting that the Fed was in no hurry to make any further interest rate cuts, but stood ready to do so if inflation declines further or the job market weakens.
But in over two hours before the Senate Banking Committee, under its new chair South Carolina Republican Tim Scott, the Fed’s core mission of maintaining stable prices and maximum employment seemed secondary.
Senators questioned him about the fate of a separate agency, the Consumer Financial Protection Bureau, that Trump wants to limit or eliminate; they asked whether Musk’s team had tried to access the Fed’s systems and whether bank accounts were still safe given Musk’s involvement at the U.S. Treasury; they grilled him on possible steps to ease bank regulation.
Most notably they quizzed him on whether Trump’s imposition of new import taxes on different countries and commodities might lead to higher inflation, an issue the Fed is concerned about and monitoring but which policymakers do not want to be seen as judging.
“The standard case for free trade…logically still makes sense,” Powell said at the hearing. But “it’s not the Fed’s job to make or comment on tariff policy…Ours is to try to react to it in a thoughtful, sensible way.”
“It is tariffs, immigration, fiscal and regulatory policy…Those will all go into a mix and we will try to make sense of it,” Powell said.
SHIFTING LANDSCAPE
It may take time. Since Trump took office, he has imposed and then delayed extensive import taxes against major trading partners Mexico and Canada, leaving Fed policymakers still with little tangible to analyze or model.
Higher inflation “is a possible outcome which will depend very much on specific facts” of what goods are taxed and by how much, he said. “In some cases it does not reach the consumer much, in some cases it does.”
Kathy Bostjancic, chief economist at Nationwide, said because of the shifting landscape around so much of the economy, she now expects the Fed to cut rates just once this year, and not until the second half.
“Fed officials want to assess the evolution of inflation and the labor market, especially considering large uncertainties surrounding prospective macroeconomic policy changes from the Trump Administration regarding tariffs, immigration, regulations and fiscal policy,” she wrote after Powell’s appearance.
Much of the rest of the hearing captured the disruption Washington felt in the first weeks of the Trump administration.
Powell ended up explaining, for example, the otherwise mechanical plumbing of the U.S. government’s process for paying bills because a team of people allied with Musk had gotten access to the U.S. Treasury system for approving payments – orders that typically run from agencies, through Treasury, then go to the Fed for payment. An attempted freeze on some payments is currently being litigated in federal court.
He was asked repeatedly about the CFPB, an agency established to oversee major banks’ compliance with consumer protection laws which, while funded by proceeds from the Fed, is separate from it.
From the possible fiscal shock of a government spending freeze to the limits a strict immigration policy may put on the labor force and the fallout from a trade war, the new administration has added a fresh dose of uncertainty to the Fed’s mission of keeping employment as high as possible with inflation held to 2% annually.
That has added to the central bank’s reluctance to commit to further interest rate cuts, something that was already emerging after progress on inflation stalled last year about half a percentage point above the Fed’s target.
New data on consumer prices will be released on Wednesday morning, ahead of a 10 a.m. EST (1500 GMT) appearance by Powell before the House Financial Services Committee.
NO NEED TO HURRY
In his prepared remarks to the committee, Powell said “the economy is strong overall and has made significant progress toward our goals over the past two years,” with a 4% jobless rate considered around the level of full employment, and inflation lower though still above target.
The Fed cut its benchmark interest rate by a full percentage point last year, but at its January meeting held rates steady in the 4.25% to 4.50% range.
“We do not need to be in a hurry to adjust our policy stance. We know that reducing policy restraint too fast or too much could hinder progress on inflation,” Powell said on Tuesday, reiterating language used after the Fed’s January meeting that further cuts would hinge on inflation declining or a clear weakening of the job market.
Investors still expect the Fed to cut rates later this year, but odds have shifted towards a single quarter point reduction.
“We are attentive to the risks to both sides of our dual mandate,” Powell said in reference to the Fed’s congressionally established goals of stable inflation and maximum employment. “Policy is well positioned to deal with the risks and uncertainties that we face.”
(Reporting by Howard Schneider; Editing by Andrea Ricci)
