Powell testimony indicates rate cuts from September, not July

·       Although Powell sounded less hawkish in Congressional testimony than last week on Fed presser, Powell will be on wait & watch in July

·       Powell/Fed is waiting for Trump’s policy/rates on tariffs and their effect on the economy, inflation, and employment

·       Powell countered Republican pressure for an immediate rate cut by pointing out that the Fed works on the economic outlook, not actual data

·       Most of the private projections are forecasting higher tariff inflation by December’25, and also in 2026, which is in line with the Fed’s projections

On Tuesday, June 24, 2025, some focus of the market was also on Fed Chair Powell’s Congressional (House) testimony apart from the Iran war tensions. On June 24, 2025, Federal Reserve Chair Jerome Powell delivered his semiannual Monetary Policy Report to the House Financial Services Committee, outlining the Federal Reserve’s perspective on the U.S. economy, monetary policy, and key challenges. Fed Chair Powell emphasized a cautious approach to interest rate adjustments, citing the economy’s solid performance, a robust labor market, and persistent inflation concerns driven by recent tariffs. He highlighted the Fed’s commitment to its dual mandate of maximum employment and price stability, noting that policy is well-positioned to respond to evolving economic conditions. The testimony also addressed political pressures, particularly from President Donald Trump, as well as the potential inflationary impact of tariffs.

Economic Outlook: Powell/Fed described the U.S. economy as being in a “solid position” with significant progress toward the Fed’s dual-mandate goals of maximum employment and stable prices.

Labor Market: The unemployment rate remains low, and labor market conditions are “solid,” indicating a state at or near maximum employment. Powell noted that fears of the labor market weakening, which prompted a half-point rate cut in September 2024, have since faded.

Inflation: Inflation has eased significantly but remains “somewhat above” the Fed’s 2% target. Powell reiterated concerns that recent tariffs could push prices higher, potentially leading to either temporary or persistent inflation. The Fed’s obligation, he stated, is to prevent a one-time price increase from becoming an ongoing (persistent) inflation problem.

Growth: The economy is performing well, with ongoing development and no immediate signs of a recession. Powell highlighted the economy’s momentum heading into 2025, supported by a healthy labor market.

Monetary Policy Stance: Powell underscored the Federal Open Market Committee’s (FOMC) commitment to a data-dependent approach, maintaining the federal funds rate at 4.25% to 4.5% since early 2025. Key policy points include:

Interest Rates: The FOMC has adopted a “wait-and-see” stance, with no immediate plans to cut rates. Powell stated, “For the time being, we are well-positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance.” This contrasts with calls from President Trump for immediate rate cuts.

Balance Sheet Reduction: The Fed continues to reduce its holdings of Treasury and agency mortgage-backed securities, with a slower pace of decline since April 2025, to ensure a smooth transition to ample reserve balances

Future Guidance: Powell noted a “significant majority” of FOMC members support rate cuts later in 2025, potentially in September, but a “significant minority” disagrees, reflecting emerging divisions. Two Trump-appointed governors, Michelle Bowman and Christopher Waller, suggested a possible July cut, increasing market speculation.

Tariff Impact: Powell highlighted that “increases in tariffs this year are likely to push up prices and weigh on economic activity.” The FOMC is not cutting rates despite favorable macros, as Tariff inflation may boost prices in the coming months.

Political Context and Fed Independence: Powell’s testimony occurred amid heightened political pressure from President Trump, who has publicly criticized Powell for not cutting rates and suggested firing him or naming a successor.

Trump’s Criticism: On June 24, Trump posted on Truth Social, calling Powell “very dumb, hardheaded” and urging Congress to pressure him. Trump has advocated for a dramatic rate cut to 1% or 2%, a move Powell and most FOMC members deem inappropriate given current economic conditions. ‘Expert economist’ Trump also ‘advised’ Fed Chair Powell to hike rates later if inflation popped up. Trump even urged the Federal Reserve Board and US Congress to ‘force’ Powell to make an immediate rate cut.

Trump’s recent deluge of truths against Fed Chair Powell:

June 24, 2025:

·       “Too Late” Jerome Powell, of the Fed, will be in Congress today to explain, among other things, why he is refusing to lower the Rate. Europe has had 10 cuts, we have had ZERO. No inflation, great economy - We should be at least two to three points lower. Would save the USA 800 Billion Dollars Per Year, plus. What a difference this would make. If things later change to the negative, increase the Rate. I hope Congress works with this very dumb, hardheaded person, over. We will be paying for his incompetence for many years to come. THE BOARD SHOULD ACTIVATE. MAKE AMERICA GREAT AGAIN!

June 21, 2025: Trump insulted Powell and again threatened to fire him for not cutting rates

·       “Too Late” Powell complains about costs, much of which were produced by the Biden Fake “Government,” but he could do the biggest and best job for our Country by helping to lower Interest Rates and, if he reduced them to the number they should be, 1% to 2%, that “numbskull” would be saving the United States of America up to 1 Trillion Dollars per year.

·       I fully understand that my strong criticism of him makes it more difficult for him to do what he should be doing; lowering Rates, but I’ve tried it all different ways. I’ve been nice, I’ve been neutral, and I’ve been nasty; and nice and neutral didn’t work! He’s a dumb guy, and an obvious Trump Hater, who should have never been there. I listened to someone that I shouldn’t have listened to, and Biden shouldn’t have reappointed him.

·       We have virtually No Inflation, our Economy is doing well, and will soon be doing even better, with the tremendous Tariff Income coming in, and Factories being built all over the Country, better than it has ever done before. If he was concerned about Inflation or anything else, then all he has to do is bring the Rate down, so we can benefit from Interest Costs, and raise it in the future when and if these “other elements” happen (which I doubt they will!). 

·       Don’t say that you think there will be Inflation sometime in the future, because there isn’t now, but if there is, raise the Rates! We should be at the TOP of the attached List, not the bottom. I don’t know why the Board doesn’t override this Total and Complete Moron! Maybe, just maybe, I’ll have to change my mind about firing him? But regardless, his Term ends shortly!

Fed Independence:  A recent Supreme Court ruling reaffirmed the Fed’s unique status, protecting its governors from removal over policy disagreements. Powell’s term as chair expires in May 2026, and his board term extends to 2028, limiting Trump’s ability to replace him immediately.

Congressional Dynamics: Republicans pressed Powell on the delay in rate cuts, aligning with Trump’s demands, while Democrats, including Senator Elizabeth Warren, also urged cuts to stimulate the economy. Powell deflected tariff policy questions, stating, “It’s not the Fed’s job to make or comment on tariff policy.”

Full Text of Fed Chair Powell’s opening remarks: June 24, 2025 Testimony

Semiannual Monetary Policy Report to the Congress

“The Federal Reserve remains squarely focused on achieving our dual-mandate goals of maximum employment and stable prices for the benefit of the American people. Despite elevated uncertainty, the economy is in a solid position. The unemployment rate remains low, and the labor market is at or near maximum employment. Inflation has come down a great deal but has been running somewhat above our 2 percent longer-run objective. We are attentive to the risks to both sides of our dual mandate.

I will review the current economic situation before turning to monetary policy.

Current Economic Situation and Outlook

Incoming data suggest that the economy remains solid. Following growth of 2.5 percent last year, gross domestic product (GDP) was reported to have edged down in the first quarter, reflecting swings in net exports that were driven by businesses bringing in imports ahead of potential tariffs. This unusual swing has complicated GDP measurement. Private domestic final purchases (PDFP)—which excludes net exports, inventory investment, and government spending—grew at a solid 2.5 percent rate. Within PDFP, growth of consumer spending moderated, while investment in equipment and intangibles rebounded from weakness in the fourth quarter. Surveys of households and businesses, however, report a decline in sentiment over recent months and elevated uncertainty about the economic outlook, largely reflecting trade policy concerns. It remains to be seen how these developments might affect future spending and investment.

In the labor market, conditions have remained solid. Payroll job gains averaged a moderate 124,000 per month in the first five months of the year. The unemployment rate, at 4.2 percent in May, remains low and has stayed in a narrow range for the past year. Wage growth has continued to moderate while still outpacing inflation. Overall, a wide set of indicators suggests that conditions in the labor market are broadly in balance and consistent with maximum employment. The labor market is not a source of significant inflationary pressures. The strong labor market conditions in recent years have helped narrow long-standing disparities in employment and earnings across demographic groups.

Inflation has eased significantly from its highs in mid-2022 but remains somewhat elevated relative to our 2 percent longer-run goal. Estimates based on the consumer price index and other data indicate that total personal consumption expenditures (PCE) prices rose 2.3 percent over the 12 months ending in May and that, excluding the volatile food and energy categories, core PCE prices rose 2.6 percent. Near-term measures of inflation expectations have moved up over recent months, as reflected in both market- and survey-based measures. Respondents to surveys of consumers, businesses, and professional forecasters point to tariffs as the driving factor. Beyond the next year or so, however, most measures of longer-term expectations remain consistent with our 2 percent inflation goal.

Monetary Policy

Our monetary policy actions are guided by our dual mandate to promote maximum employment and stable prices for the American people. With the labor market at or near maximum employment and inflation remaining somewhat elevated, the Federal Open Market Committee (FOMC) has maintained the target range for the federal funds rate at 4-1/4 to 4-1/2 percent since the beginning of the year. We have also continued to reduce our holdings of Treasury and agency mortgage-backed securities and, beginning in April, further slowed the pace of this decline to facilitate a smooth transition to ample reserve balances. We will continue to determine the appropriate stance of monetary policy based on the incoming data, the evolving outlook, and the balance of risks.

Policy changes continue to evolve, and their effects on the economy remain uncertain. The effects of tariffs will depend, among other things, on their ultimate level. Expectations of that level, and thus of the related economic effects, reached a peak in April and have since declined. Even so, increases in tariffs this year are likely to push up prices and weigh on economic activity. The effects on inflation could be short-lived, reflecting a one-time shift in the price level. It is also possible that the inflationary effects could instead be more persistent. Avoiding that outcome will depend on the size of the tariff effects, on how long it takes for them to pass through fully into prices, and, ultimately, on keeping longer-term inflation expectations well anchored.

The FOMC must keep longer-term inflation expectations well anchored to prevent a one-time increase in the price level from becoming an ongoing inflation problem. As we act to meet that obligation, we will balance our maximum-employment and price-stability mandates, keeping in mind that, without price stability, we cannot achieve the long periods of strong labor market conditions that benefit all Americans.

For the time being, we are well-positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance.

To conclude, we understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We at the Fed will do everything we can to achieve our maximum-employment and price-stability goals.”

Key Discussion Points in Q&A-Powell testimony-June 24, 2025

The Q&A session covered a range of topics beyond monetary policy, reflecting broader economic and political concerns:

Tariffs and Trade: Lawmakers pressed Powell on the impact of Trump’s tariffs. He reiterated that tariffs could increase inflation and slow growth but avoided commenting on trade policy specifics, referencing his long-standing stance of not commenting on fiscal policies; the Fed’s job is to control inflation or manage price stability, ensuring maximum inclusive employment, which may be required as a result of such fiscal policies. Although Trump’s chaotic tariffs & immigration policies may result in higher inflation and lower employment and economic growth, i.e., stagflation, the Fed will not hike rates due to its potential transitory nature. But, at the same time, the Fed will wait for some time before going for a rate cut resumption as the Fed likes to have more information about the levels of such tariffs and their overall impact on US economic activities.

Consumer Financial Protection Bureau (CFPB): Questions arose about the CFPB’s future, given Trump’s intent to limit or eliminate it. Powell avoided direct engagement, focusing on the Fed’s core mandate.

Bank Safety and Regulation: Senators inquired about bank account safety amid concerns over Elon Musk’s involvement in government systems. Powell reassured the public of the banking system’s stability.

Geopolitical Risks: The recent U.S. attack on Iran and the Israel-Iran ceasefire were raised as potential economic disruptors. Powell acknowledged these risks but emphasized that the US is now no longer dependent on imported oil & gas and thus the overall inflationary impact will be quite limited.

Market Impact: The CME FedWatch Tool indicated a 23% probability of a 25-basis-point rate cut in July and an 82% probability in September, reflecting uncertainty driven by Bowman and Waller’s comments. The U.S. dollar slipped, and European stocks rose on optimism over the Israel-Iran ceasefire.

Analyst Perspectives: Powell’s challenge in unifying the FOMC amid internal divisions and external pressures; naming a “shadow” Fed chair could confuse markets and undermine credibility.

Implications: Powell’s testimony has several implications for monetary policy, markets, and the Fed’s role.

·       Monetary Policy: The Fed’s cautious stance suggests rates will likely remain unchanged through at least July, with September as a potential pivot point. The FOMC’s data-dependent approach will focus on tariff impacts, inflation trends, and labor market indicators.

·       Political Tensions: Trump’s pressure and the FOMC’s internal divisions could complicate policy communication. Powell’s emphasis on independence reinforces the Fed’s commitment to its mandate over political influence.

·       Economic Risks: Tariffs and geopolitical uncertainties, including Middle East tensions, pose upside risks to inflation and downside risks to growth. The Fed’s ability to balance these risks will be critical.

In summary, Federal Reserve Chair Jerome Powell’s testimony on June 24, 2025, reaffirmed the Fed’s commitment to a stable, data-driven monetary policy amid a complex economic landscape. By maintaining the federal funds rate and adopting a wait-and-see approach, Powell signaled confidence in the economy’s strength while acknowledging risks from tariffs and geopolitical factors. Despite political pressures, Powell upheld the Fed’s independence, navigating questions on trade, regulation, and banking stability. As the Fed monitors incoming data, its next steps will hinge on inflation’s trajectory and the broader economic impact of Trump’s policies. The testimony underscores the Fed’s delicate balancing act in achieving its dual mandate while maintaining credibility in a politically charged environment.

Highlights of Powell’s comments at the Semi-Annual Congressional Testimony: June 24-25, 2025

·       We're going to put out something on SLR for comment today

·       Changes to forecasts partly reflect trade policy effects

·       We don't consider Federal debt in monetary policy decisions

·       Fiscal policy can add to inflation, but I don't comment

·       I agree that adjusting SLR would free up capital for banks

·       I am pretty confident will move on to Basel 3 and SLR shortly

·       The bond market is fine now and functioning well

·       Powell asked about recent weakness in the dollar: Markets have been digesting an unusually challenging set of circumstances.

·       I'm open to the possibility that tariffs translating to inflation will be more or less than we think, but we may also be wrong completely and have to learn something new.

·       Waiting to see what shows up in measured inflation

·       In the last couple of years, the Stablecoin industry has matured and become more mainstream

·       We're looking at and withdrawing much prior crypto guidance

·       When asked about the risks of stagflation, we're not seeing that now

·       Stagflation is not the base case, but the Fed is monitoring

·       If there were stagflation, it would put the Fed in a hard place

·       In high uncertainty, as we are now, I want to take a signal from the real data, and not be so brave about forecasts; we have to be humble about forecasts

·       It is prudent for the Fed to reconsider the rule, given the stark increase in the level of relatively safe assets on bank balance sheets

·       We are well-positioned for the time being to wait to learn more about the likely course of the economy before adjusting policy

·       The economy is solid despite elevated uncertainty

·       We are near full employment, and inflation is somewhat above 2% target

·       A strong labor market has helped narrow demographic disparities in earnings, employment

·       We're attentive to risks on both sides of the Fed's mandate

·       Increased tariffs are likely to push up inflation and weigh on economic activity

·       To meet that obligation will balance employment and price stability mandates

·       The Fed must prevent a one-time increase in price level from becoming an ongoing (persistent) inflation problem by keeping inflation expectations well anchored

·       Without price stability, it cannot achieve long periods of strong labor market conditions

·       Tariffs are likely to push up prices and weigh on the economy

·       Long-run inflation expectations are consistent with 2% target

·       The US is not in recession

·       We could see inflation come in not as strong as expected. If that's the case, we would suggest cutting sooner.

·       Also, a weakening labor market would suggest cutting sooner

·       The Fed projections are for inflation to move up because of higher tariffs potential

·       The significant majority of policymakers feel it will be appropriate to reduce rates later this year

·       It's too early to know the economic implications of the Middle East

·       The story has been evolving, and our thinking has been adapting

·       We are not facing a tension (conflict) between dual mandates

·       The reason we are not cutting rates is that forecasts in and out of the Fed expect a meaningful increase in inflation this year

·       Fed policy won't be a driver of the longer-run housing supply

·       Banks are free to provide banking services to the crypto industry and conduct activities as long as they protect safety and soundness

·       Rental inflation is now coming down quite regularly

·       I wouldn't say I'm concerned about the quality of data today, but the direction is concerning

·       We do expect tariff inflation to show up more

·       We expect tariff inflation to show up more, but we don't know how much will be passed to consumers after absorption by both importers & exporters.

·       We are at higher levels of rates, with significantly more room to cut than there was when rates were near.

·       As long as the economy is strong, we can take a little bit of a pause here

·       It's too soon to say anything about supply chains. We're watching that

·       When the time is right, expect rate cuts to continue

·       Data suggests that at least some of the tariffs will hit consumers

·       I think we'll start to see more tariff inflation starting in June

·       I think we'll see tariff inflation in the June and July numbers

·       We will be learning as we go through the summer

·       I'm perfectly open to the idea that tariff-inflation pass-through will be less than we think.

·       We don't need to be in any rush.

·       If it turns out inflation pressures are contained, we will get to a place where we cut rates.

·       I won't point to a particular month

·       The Fed is just trying to be careful/cautious with inflation

·       Powell asked why not cut rates: It is uncertainty about the size and potential persistence of inflation from tariffs

·       The economy is slowing this year. Immigration is one reason

·       The shock absorber from the US oil industry is in question now

·       The Fed would look at the overall situation if oil prices surge

·       The dollar is going to be the reserve currency for a long time

·       The Treasury markets are functioning well and normally

·       Rates are modestly, not moderately, restrictive

·       I don't think MBS runoff has a large impact on housing costs (in terms of borrowings/mortgage costs)

·       We are getting closer to price stability, but we are not quite there yet

·       I think the Fed is on the right track in shrinking its balance sheet (QT)

·       The Fed has some shrinking left to do on its balance sheet

·       We have some shrinking left to do on the balance sheet. We think we can go for a good while at this speed

·       Credit conditions for small businesses are a little bit tight

·       We would expect to see meaningful tariff inflation effects in June, July, or August

·       Right now, we're in watch-and-wait mode

·       Overall, the inflation picture is pretty positive

·       Out of five Taylor’s simple monetary policy rules, one suggests rate hikes, while four others suggest the present levels of the rate.

Conclusions:

Compared to his Fed presser on June 18, Powell sounded less hawkish in his Congressional Testimony (June 24-25). This, along with recent dovish comments by Fed’s Governor Waller and Bowman (both Trump-appointed) and other Fed policymakers' less dovish comments, indicates Fed is now debating the timing of rate cuts, not about whether Fed will cut or not cut. Although the Fed generally talks about 2.0% PCE inflation as a price stability target, in reality, it maintains 1.5% core/total PCE inflation and 2.3% core/total CPI inflation; i.e., around 1.9% average inflation (PCE+CPI) targets.

The US Congress has entrusted the Fed dual mandate of 2% inflation (price stability) along with maximum inclusive employment, 96.0-95.5% of the labor force; i.e., 4.0-3.5% headline unemployment rate. Fed will now try to bring down average core inflation from around 3.0% to 2.5% by keeping the unemployment rate at least around 4.0-4.5% by December’25 and then 2.0% core inflation and 3.5% unemployment rate by December’26 to achieve its mandate of maximum employment and price stability.

Fed may act in September and December’25, depending upon Trump’s implemented tariffs and overall US economic situation. Fed may maintain wait & watch stance till August’2025, as by then Trump’s tariff policies may take a potential clear shape of a 10% basic/universal rate with some sectoral tariffs ranging from 25% to 50%. Even if Trump makes a final decision of a 10% ‘smaller’ tariff, including that on China, by early July-August (along with sectoral tariffs), the Fed needs time to evaluate the weighted average cost of tariffs on the economy and thus may act only from September 2025.

Trump is now too busy with the Iran war and may extend his reciprocal tariffs pause from July-August to December’25 to ensure no supply shock for the US economy. Trump may continue his chaotic tariff policy to get a fair trade deal for the US. If Trump goes on with his higher reciprocal tariffs, it would cause a supply shock and a higher cost of living for ordinary Americans, most of whom live on a pay check to paycheck-to-paycheck basis. Further, such tariffs would cause a demand shock in the future and an all-out recession. This will also cause a loss of Vote Bank (ordinary Americans) and Note Bank (political funding by corporate America) for Trump and Republicans. Thus, Trump is bound to blink and may take a less hawkish tariff position in the coming days.

Fed may be waiting & watching stance till mid-September 2025, as by then Trump’s tariff policies may take a potential clear shape of a 10% basic/universal rate with some sectoral tariffs ranging from 25% to 50%. Even if Trump makes a final decision of a 10% ‘smaller’ tariff, including that on China, by early July (along with sectoral tariffs), the Fed needs time to evaluate the weighted average cost of tariffs on the economy and thus may act only from September 2025.

Powell said that out of five simple monetary policy rules, Taylor’s 1993 modified rule indicates higher rates. But if we consider the modified Taylor rule (inflation, unemployment, and GDP growth), ideally Fed should cut 50 bps in 2025.

Trump may stick to his flip-flop (bullying) negotiation tactics to get better tariff deals for the US, and he may continue this back & forth strategy on tariffs till at least December 2025. But even then Fed may cut 25 bps each in September and December’25. Looking ahead, if, by early 2026, Trump’s tariff policy does get clarity, then the Fed may modify its dot-plots in March’26 SEP and go for a 50 bps rate cut each in 2026-27 for a terminal rate of 3.00% by Dec’27 instead of Dec’28.

But 15.5% weighted average Trump tariffs effective from Q2CY25 may boost US inflation from Q2/Q3CY25 onwards. The Trump admin also knows this fact and thus is now pressuring the Fed to go for a crisis-era rate cut of 100-200 bps at a time or within a short span. By pressuring the Fed, US President Trump is complicating the Fed’s job more and also hurting the future credibility of the Fed as an independent institution. This may hurt the USD's credibility as a global reserve currency in the future, and the US may be losing the advantage of its greatest weapon, the USD hegemony, which it uses for geopolitical influence and becoming the number one superpower in the world.

Fed may also be assuming 15.5%-25.5% weighted average US tariffs as the best base case vs 2.5% pre-Trump 2.0. Fed is assuming equal distribution of Trump tariffs burden @1/3rd each on US consumers,  importers, and also exporters, in which case core CPI inflation may be boosted by 0.5-1.0% from present average levels of 3.0% and unemployment will be higher by 0.5-1.0% from present average 4.0%. At present, as the US economy is solid in terms of overall economic activities, stable prices and employment, the Fed can afford to wait & watch to gauze the likely impact of Trump’s policies on US price stability/inflation and also employment; Fed works on potential economic outlook, not actual data to stay ahead of the curve.

Bottom line:

Fed may cut in September and December 2025 @25 bps each; Fed may not cut in July despite Trump’s pressure and sudden comments by Fed’s Governor Waller and Bowman.

Technical outlook: DJ-30, NQ-100, and Gold

Looking ahead, whatever may be the narrative, technically Dow Future (CMP: 42600) now has to sustain over 43000-43100 for a further rally towards 43200/43600*-44000/45300 in the coming days; otherwise sustaining below 42900-42800, DJ-30 may again fall to 41900/41700-41400/41000* and further 40600/40100-39200/38000 in the coming days.

Similarly, NQ-100 Future (21900) has to sustain over 22400-22500 for a further rally to 22700/23000 in the coming days; otherwise, sustaining below 21900, NQ-100 may again fall to 21900/20900-20700/20200 and 19890/18300-17400/16400in the coming days.

Technically Gold (CMP: 3350) has to sustain over 3375-3395 for a further rally to 3405/3425*-3450/3505*, and even 3525/3555 in the coming days; otherwise sustaining below 3365, Gold may again fall to 3340/3320-3300/3280 and 3255/3225-3200/3165* and further to 3130/3115*-3075/3015-2990/2975-2960*/2900* and 2800/2750 in the coming days.