Fed Testimony: Powell says, we can afford to wait for longer

25 Jun 2025 , 09:15 AM

WHY THE FED TESTIMONY WAS CRUCIAL THIS TIME?

Twice a year, when the Fed presents its Semi Annual monetary policy to the US Congress, there is a practice wherein the Fed chair has to testify before the Congress. The testimony is crucial as it is done under oath and hence the statements made in the testimony can be taken as more reflective of the monetary thinking of the Fed. This time around, when Jerome Powell testified before the US Congress on the semi-annual monetary policy; the significance was due to the open differences on rate action with the US President.

Over the last few months, the US President has been trying to coax the Fed chair to give a boost to growth by cutting the Fed rates. However, Powell has stuck to his stand that the time was not yet ripe for rate cuts. Powell has specifically pointed to the uncertainty created by the reciprocal tariff announcement and its implications for growth, jobs, and inflation in the US economy. As Powell testified, they have a tightrope to walk, but on the monetary policy front, the Fed is taking no chances. Fed has stuck to its core principal of achieving the dual mandate of price stability and maximum employment.

FED EVALUATION OF GDP, UNEMPLOYMENT, AND INFLATION

With the Fed focused on its dual mandate, its focus logically remains on GDP growth, jobs, and inflation (including core inflation). Let us look at GDP growth first. After reporting 2.5% GDP growth in CY-2024, the US GDP contracted in Q1 as per the first two estimates. The final estimate is expected later this week, but it is unlikely to change. However, the Fed has reiterated that the data may be distorted due to front-loading of imports ahead of the tariffs. Also, if one looks at Private Domestic Final Purchases (PDFP), which excludes net exports, inventory investment, and government spending; then the US economy has grown at 2.5% even in Q1-2025. However, tariffs continue to be a major headwind for GDP.

For the last 4 months, the unemployment rate has been steady at 4.2%. Non-farm payroll additions continue to be well above 1,00,000 every month, the cut-off needed to sustain current level of GDP growth. While wage growth has moderated compared to the heady days of 2021 and 2022; it continues to be above the rate of inflation. In a nutshell, workers are better off in terms of purchasing power.

PCE inflation for April was at 2.3%, which is just 30 bps above the Fed median. That too has been overly influenced by core inflation at 2.6%. However, it must be noted that Inflation has eased significantly from the 2022 highs. While the Fed does expect an impact of reciprocal tariffs on inflation (including core inflation), it is likely to be a one-time impact. The expectation is that by mid-2026, the inflation should substantially ease out.

HOW DOES POWELL SEE MONETARY POLICY SHAPING UP?

Powell underlined that the Fed policy stance would continue to be guided by the dual mandate of price stability and full employment. Powell has underlined that he does not see any reason to deviate from the current Fed rate range of 4.25% to 4.50%. Powell has also clarified that the monetary stance would only be determined by the incoming data, the evolving outlook, and the balance of risks; and not influenced by any form of pressure.

For now, the Fed stance is that policy changes pertaining to tariffs are still too fluid and the impact of tariffs will eventually depend on the final level of tariffs. For now, it seems like the increases in tariffs will push up prices and weigh on economic activity. One has to really observe the data, whether the impact of inflation will be a one-time shift or more persistent. Either ways, Fed sees no reason to drastically change its monetary policy course!