This week, Federal Reserve Chair Jerome Powell will appear before Congress, facing intensified calls from both external and internal sources to initiate a reduction in interest rates.
Powell’s semiannual testimony begins on Tuesday morning as he presents the Fed’s monetary policy report to the House Financial Services Committee, before heading to the Senate Banking Committee on Wednesday.
The mandated sessions typically allow the Fed chair to provide an overview of the economic landscape and monetary policy, giving legislators an opportunity to ask questions that can sometimes turn skeptical, although they rarely become heated.
This time, however, the atmosphere has shifted. President Donald Trump and several White House officials are exerting pressure on Powell to lower rates, coinciding with statements from two influential Fed officials who signaled their support for a rate cut as early as July.
This convergence of events has sparked speculation in Wall Street regarding the diminishing political neutrality historically observed in the Federal Open Market Committee.
Mohamed El-Erian, chief economic advisor at Allianz, commented on Finance Newso that, “There’s some political influence starting to come into the FOMC.”
His remarks followed Fed Governor Michelle Bowman’s speech in Prague, where she indicated that a case could be made for easing policies next month, contingent upon favorable inflation data.
Accompanying remarks from Governor Christopher Waller echoed this sentiment, indicating a potential divergence from Powell’s previous assertions that the policy is well-positioned to exercise patience while the effects of tariffs are assessed.
Notably, both Waller and Bowman are Trump appointees from his first term, and they have been mentioned as possible successors to Powell in the upcoming year.
El-Erian noted, “Now suddenly we’ve had two Republican-leaning governors who have come out with this notion of July, and they’ve moved the market.” He expressed skepticism about Powell’s ability to unify the committee behind a cohesive message.
As traders reassess expectations, the likelihood of a rate cut in July has risen to approximately 23%, with an even higher probability of 82% for a cut in September, according to the CME Group’s FedWatch futures pricing tool.
As Powell anticipates his two days of testimony, he is likely to encounter pointed inquiries from both Republican legislators, who may echo Trump’s demands for easier monetary policy, and Democratic lawmakers such as Senator Elizabeth Warren, who has also urged for a rate reduction.
Assessing Trump’s Demands
Despite Trump’s calls for substantial cuts—suggesting reductions of at least 2 percentage points—such drastic measures are improbable.
Waller, in an interview with Finance Newso, underscored the need to “start slow” regarding rate cuts. Recommendations from the most recent FOMC meeting indicated that the terminal rate for the federal funds rate may be set around 3%, a mere 1.25 percentage points lower than its current level.
Substantial cuts may also prove counterproductive. Following the Fed’s reduction of a full percentage point from September to December of the previous year, Treasury yields actually rose, aligning with investor expectations for increased economic growth and inflation.
Jai Kedia, a research fellow at the Cato Institute, remarked, “The idea that the Fed does something and there’s immediate transmission and everything works exactly the way it’s supposed to work is just a myth.” He emphasized that the perceived influence of the Fed on the economy may be overstated, especially in the short term.
Nonetheless, the administration is pressing for swift action, even as Powell remains just one of the 12 voters on the committee responsible for setting interest rates.
Bill Pulte, director of the Federal Housing Finance Agency, recently suggested on X that pressure is “building for Powell’s immediate resignation,” contending that “it is clear that Powell’s political bias against our great President needs to be looked at.”
The Fed’s Mandate
Kedia characterized the White House’s push for immediate action from the Fed as irresponsible, stating that lowering federal borrowing costs is not the central bank’s primary objective.
He noted, “The Fed’s mandate is actually to stabilize inflation and stabilize employment. We can debate whether it should have that mandate, or how successful it’s been in doing that, but if you put it in charge of the federal debt, you may as well kiss that mandate goodbye.”
While Kedia believes the Fed could potentially initiate rate cuts, market conditions currently favor a September adjustment over a July one, given the divided opinions within the FOMC regarding the direction and scale of any cuts.
He cautioned that capitulating to political pressures could jeopardize both the economy and the Fed’s reputation. “A good economic case can be made that the Fed should cut rates, but that’s got nothing to do with the political aspect,” he stated.
