The high tariff inflation puzzle remains unsolved: Powell admits that "the lack of modern precedents" has led to policy stagnation.

Written by: Li Dan, Wall Street Watch

Original Title: The Day After Powell's Congressional Hearing: Tariffs at an Unprecedented Level, Uncertain Impact on Inflation

On the day following a special congressional hearing on the Federal Reserve's monetary policy, Fed Chairman Powell once again mentioned the prospect of interest rate cuts. He reiterated that there is no rush to cut rates, emphasized that high tariffs bring significant uncertainty, and pointed out that the U.S. economy is quite strong, providing reasons to act slowly in uncertain situations, while also mentioning some factors that could drive interest rate cuts.

At the hearing of the U.S. Senate Banking, Housing, and Urban Affairs Committee held on Wednesday, June 25, Eastern Time, Powell told lawmakers that future trade agreements may allow the Federal Reserve to consider lowering interest rates.

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

Regarding inflation, Powell stated that stagflation is not a fundamental scenario for the U.S. economy, but the Federal Reserve is monitoring prices in the U.S. Over time, regulation can also lead to a slowdown in inflation.

Current high tariffs have no modern precedent, and their impact on inflation will become apparent in the coming months.

Powell stated during his testimony that due to a lack of historical experience, Federal Reserve officials find it difficult 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 due to the lack of precedent that the Federal Reserve currently feels uncertain about making any policy adjustments. Powell said:

"This is challenging for several reasons, one of which is the lack of modern precedents, and we must remain humble in our estimates. The impact of inflation transmission may be greater than we think, or it may be smaller than we imagine, which is why we are not in a hurry to act."

Powell said that the Federal Reserve is waiting to see who will ultimately bear the majority of the tariffs and how the tariffs will be reflected in measured inflation.

Powell believes that the tariff measures of the Trump administration may push up inflation in the coming months.

Powell said that reasonable expectations are that tariffs will cause a certain degree of inflation. He stated that most Federal Reserve officials support a rate cut this year, and the Fed wants to observe the changes in inflation over the next few months.

"Tariffs will bring some inflation. It is not present yet, but will manifest in the coming months."

Consumers may have to bear some tariffs, which are hard to predict in advance. The Fed is still working to determine the impact and is waiting for more data.

At the hearing in the House of Representatives this Tuesday, Powell stated that data shows that at least some tariffs will be borne by consumers. He said at the time that initially, it was the importers who paid for the tariffs. However, over time, five different participants will bear the burden: manufacturers, exporters, retailers, and consumers.

This Wednesday, Powell again stated that the Federal Reserve 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's hard to predict this in advance."

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

Some Republican senators criticized Powell, characterizing tariffs as a potential driver 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 lawmaker, Bernie Moreno, accused Powell of political bias, saying "You should consider whether you are viewing this issue from a fiscal perspective or a political perspective because you simply dislike tariffs." Powell did not respond.

However, Powell reiterated that most Federal Reserve officials do support a rate cut this year. He went on to say that tariffs may not significantly drive up inflation.

At the House hearing on Tuesday, 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. A decline in inflation and a weak labor market could mean an earlier rate cut.

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

Powell has previously stated multiple times that the fiscal path of the U.S. government is unsustainable when describing the country's fiscal deficit. He has mentioned that the growth of U.S. debt has outpaced economic growth, making it unsustainable. In this hearing, Powell again brought up government debt.

Powell said that the issue of U.S. federal government debt will not be considered in the monetary policy decisions of the Federal Open Market Committee (FOMC). Fiscal policy can exacerbate inflationary pressures, but the Federal Reserve will not comment on this risk. The scale of U.S. debt has not affected the Federal Reserve's fulfillment of its responsibilities.

Powell usually avoids commenting on fiscal policy. However, during the hearing on Wednesday, 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 can negatively impact borrowers' ability to fully participate in economic activities, which in turn can weigh down the overall economy.

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

The US Treasury market is functioning well, liquidity is appropriate, and the dollar remains the global reserve currency

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

Powell believes that the US dollar is still the global reserve currency. He does not have an opinion on whether the dollar is overvalued, but mentioned that some people believe the dollar is overvalued.

At the hearing in the House of Representatives this Tuesday, Powell defended the global status of the US dollar, stating that the dollar remains the number one safe-haven currency to this day, and that the fluctuations in the US Treasury market in April did not undermine this status.

The cancellation of the reserve interest payment mechanism will not save money for banks

Powell stated that even if the mechanism for paying interest on reserves deposited at the Federal Reserve is revoked, it will not save banks money, and restoring the scarce reserves system will be challenging and may trigger market volatility.

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

The U.S. Congress approved the above mechanism before 2006, and the Federal Reserve began paying interest on reserves held by commercial banks. Subsequently, one of the policy rates that emerged for the Federal Reserve to control short-term interest rates was the Interest on Excess Reserves (IORB), also known as the Reserve Balance Rate. IORB acts as the upper bound of the Federal Reserve's interest rate corridor, while the Overnight Reverse Repurchase Agreement Rate (ON RRP) serves as the lower bound of the corridor.

Reports about the Federal Reserve headquarters renovation costing $2.5 billion are highly provocative

In recent months, media reports have indicated that the renovation of the Marriner S. Eccles building, the headquarters of the Federal Reserve in Washington D.C., is expected to cost around $2.5 billion. As a result, the Federal Reserve is facing pressure from external criticism. Elon Musk, who previously led the Department of Government Efficiency (DOGE), specifically mentioned this project, stating, "We absolutely should see if the Federal Reserve spent $2.5 billion hiring interior designers. It’s really surprising."

At the hearing on Wednesday, a congressman questioned the aforementioned renovation plan, and Powell stated that the Federal Reserve "takes seriously its responsibility as a steward of public funds, and no one wants to renovate a historic building." He also mentioned that the headquarters building is neither safe nor waterproof and needs renovation, and this matter can be left to his successor.

According to media reports, the early plans for the Marriner S. Eccles building included a rooftop garden, water features, and an upgraded executive dining room. Powell stated at a hearing this Wednesday that these reports are inaccurate and are all sensationalist.

Powell said, "All the sensational content reported by the media is not in the current plan. No VIP restaurant, no new marble, no dedicated elevator. No new water features, no beehive, and no rooftop terrace garden."