Written by: He Hao, Bu Shuqing, Wall Street Journal

On Tuesday local time, Federal Reserve Chair Powell spoke at a conference hosted by the European Central Bank in Portugal, alongside central bank leaders from Europe and Asia.

Powell stated that stable economic activity gives the Federal Reserve time to study the impact of tariff increases on prices and economic growth before resuming rate cuts. He is keeping multiple options open. Powell reiterated his previous viewpoint on Tuesday:

We are just taking a wait-and-see approach. As long as the U.S. economy remains robust, we believe the prudent approach is to wait, gather more information, and observe what these impacts might be.
A clear majority of Federal Reserve officials expect a rate cut later this year.

In recent weeks, investors have raised their expectations for the Federal Reserve to cut rates in the second half of this year due to inflation data from April and May being lower than some economists' expectations.

Powell stated that if it weren't for concerns that tariffs could undermine the last phase of the Federal Reserve's efforts to suppress inflation in recent years, the Federal Reserve would very likely continue to gradually cut rates this year. When asked whether the Federal Reserve would cut rates again if Trump hadn't announced his controversial tariff plans on many foreign trading partners earlier this year, Powell replied:

I think so. In fact, when we look at the scale of tariffs and the significant increase in almost all inflation forecasts for the U.S. due to tariffs, we paused the rate cuts.

Regarding the upcoming July FOMC meeting at the end of this month, Powell refused to make a prediction, stating that the future economic outlook will determine policy direction. 'I will not rule out any meeting, nor will I specifically put it on the agenda.'

On inflation and the labor market

After a significant decline over the past two years, a key core inflation indicator is currently stabilizing slightly above the Federal Reserve's 2% target. According to the Federal Reserve's preferred measure, core inflation excluding food and energy was 2.7% in May.

Federal Reserve officials generally expect tariffs to push prices higher this summer. Powell stated that officials will closely monitor whether inflation manifests itself. 'Inflation is performing as we expected and hoped. We anticipate that summer inflation data will rise.'

Powell reiterated that the effects of tariffs are expected to manifest in inflation data in the coming months, but he also acknowledged that uncertainties still exist. 'We are monitoring and expect to see some higher numbers this summer.' He added that the impact of tariffs could be greater or lesser than expected, and the timing may come earlier or later than anticipated, and policymakers are mentally prepared for these.

Despite Trump's strong pressure for a rate cut, the Federal Reserve has not cut rates so far this year, partly to observe whether the price increases triggered by tariffs will evolve into more persistent inflation. However, prices have not significantly risen due to inflation so far. Powell said, 'We have always said that there is a high degree of uncertainty regarding the timing, magnitude, and duration of inflation.'

When discussing the labor market, he stated: 'We expect the labor market to gradually cool down. We are closely monitoring any signs of unexpected weakness.'

During his testimony in Congress last week, Powell hinted that Federal Reserve officials are more likely to wait until at least after the September meeting to assess the extent of price increases driven by tariffs.

'New Federal Reserve News Agency' commentary

Renowned financial journalist Nick Timiraos, known as the 'New Federal Reserve News Agency,' commented:

Recent remarks from Powell, including those made during Tuesday's discussion, indicate that he is working to maintain broad flexibility in policy in the coming months. This suggests that the Federal Reserve's rate-cutting strategy may undergo a shift — especially if the final increase in tariffs is lower than the levels announced by Trump in April.
In the past, the Federal Reserve might have needed clear signs of economic deterioration to cut rates, but Powell now suggests that in the current environment, weak summer employment data and price increases below expectations may be enough to prompt a return to rate cuts.

Timiraos cited some analysts' views that the Federal Reserve might resume rate cuts for another reason: they believe that tariffs are more likely to compress corporate profits, weaken economic activity, and increase unemployment, rather than trigger persistent and meaningful inflation.

Timiraos pointed out that consumer spending data this year shows signs of slowing, particularly in discretionary spending areas like travel.

Internal divisions within the Federal Reserve

The Federal Reserve unanimously voted to keep interest rates unchanged at the June meeting, but the latest dot plot shows that officials have differing views on the future path of interest rates. Ten policymakers expect at least two rate cuts this year, seven officials predict no rate cuts in 2025, and two expect only one rate cut before the end of this year.

According to previous articles by Wall Street Journal, there is a 'historical level of division' within the Federal Reserve regarding the path of monetary policy. Bowman and Waller support a rate cut as early as July because they believe the price increases triggered by tariffs are temporary; however, hawkish Harker disagrees, and Powell emphasizes the need to observe summer data. Some officials are concerned that Trump's significant increase in import tariffs this spring could reignite inflationary pressures, especially after high inflation in recent years has made companies more adept at raising prices.

The market expects the Federal Reserve to cut interest rates by 70 basis points this year, with Citigroup still predicting the first rate cut in September but acknowledging an increased possibility in July.

Pressure from the Trump administration

Powell's remarks came after he faced rare public criticism from Trump and his senior advisors, who accused Powell of partisan bias — something Powell firmly denied. The Federal Reserve cut rates by 1 percentage point last year, while Trump had called for a cut of up to 3 percentage points.

Republicans in the U.S. Congress are pushing a tax cut bill, and some analysts believe this will exacerbate the fiscal deficit in the coming years. Previously, the U.S. government's efficiency department attempted to cut spending, but it fell far short of expectations, highlighting the difficulty of reducing the deficit.

In a letter to Powell released by the White House on Monday, Trump reiterated his desire to lower interest rates, arguing that it would reduce U.S. interest expenses. However, this argument lacks persuasiveness in the eyes of the Federal Reserve, as Congress has authorized it to maintain low inflation and strong employment — conditions that many economists believe are the basis for ultimately achieving lower borrowing costs.

U.S. Treasury Secretary Becerra recently stated in a television interview that the Federal Reserve seems to still be haunted by the 'trauma' of high inflation experienced in 2021-2022. He compared the Federal Reserve to an elderly person who has fallen, stating that by looking down at the ground out of fear of falling again, they are more likely to fall again.

Although Powell's term as Fed Chair will last until May next year, Becerra has also stated that the White House may nominate a former successor in October or November to fill the board seat that will become vacant in February next year.

On Tuesday, Powell deliberately avoided responding to the White House's ongoing criticism of his intelligence and integrity.

At a welcome dinner for central bank meetings held on Monday, after ECB President Lagarde referred to Powell as 'embodying the standard of a brave central banker,' Powell received a standing ovation from attendees.