Federal Reserve Chair Jerome Powell told lawmakers on Tuesday the argument for free trade still makes sense but added that it was not the role of the central bank to comment on tariff or trade policy but to react to how it impacts the economy.
“The standard case for free trade…logically still makes sense,” Powell said in response to questioning at a hearing before the Senate Banking Committee. 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.”
Powell spoke as the Trump administration begins rolling out import taxes on different countries and commodities, adding a fresh dose of uncertainty to the Fed’s battle against inflation that remains more than half a percentage point above the Fed’s 2% target.
Debate over how the combination of administration policies will impact the economy has added to the central bank’s reluctance to commit to further interest rate cuts until it is clear what policies might be pursued, which might be implemented, and how they might influence an economy Powell described as “in a pretty good place.”
In response to questions about mortgage rates that remain high by recent standards, Powell said there was no way to know when those or other market-controlled long-term rates might abate.
“I don’t know when that will happen,” Powell said, noting that long-term bond yields change as a result not just of Fed policy, but of expectations about future inflation, US federal debt and other factors.
Powell was questioned on a broad range of topics, with senators focusing on the implications of Trump administration moves to limit or eliminate the Consumer Financial Protection Bureau, and other issues.
But he did receive a vote of confidence from one prominent conservative voice, with Louisiana Republican John Kennedy saying “I wanted to thank you and your colleagues” for delivering what he referred to as a “soft landing” from high inflation that also managed to keep unemployment low.
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.
“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, reiterating language used after the Fed at its January meeting held interest rates steady and indicated further cuts would hinge on inflation declining and the job market remaining healthy.
Referenced only obliquely in Powell’s opening remarks were the “risks and uncertainties” the economy faces as the new Trump administration imposes broad new import taxes on some countries and industrial goods, deports immigrants that have been a source of recent labor force growth, and contemplates tax and regulatory reforms.
“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.”
Powell’s Senate testimony is the first of two days of hearings on Capitol Hill that come as the Fed grapples with how policies enacted and expected from President Donald Trump impact an economy that, by many metrics, is already performing well.
Stepping carefully
Powell and other Fed officials are always careful to sidestep judgment about the wisdom of executive branch or congressional actions, keeping their focus on how the economy changes as a result.
But given where the economy stands and the extent of what Trump seems to intend, the premium at the Fed for now is to go slow and hope nothing breaks.
The possibility of steep tariffs on close trading partners like Mexico and Canada and on core industrial products like steel and aluminum has triggered debate over the ways in which such import taxes would or wouldn’t cause generalized inflation.
The administration hasn’t rolled out a detailed tax, spending and deregulation plan yet, but coming negotiations over those issues could have a large influence on the economy’s performance.
For now, investors have read recent data, and in particular the January employment report showing the jobless rate falling to 4% and a strong pace of wage increases, as arguing for fewer Fed rate cuts this year. Markets still anticipate a quarter point reduction in the central bank’s policy rate in June, but have begun pricing out any other moves this year.
The Fed at its January meeting held the policy rate steady in the 4.25% to 4.50% range after cutting a full percentage point in the last three meetings of 2024.
Powell will deliver a second round of testimony before the House Financial Services Committee at 10 a.m. EST on Wednesday.