The Blubber

Federal Reserve Chairman Jerome Powell carefully avoided addressing the potential economic impact of President Donald Trump’s policies on Tuesday, while reiterating that the central bank is not rushing to reduce interest rates.

When questioned about the possible effects of Trump’s import tariffs on the economy or inflation, Powell said it was difficult to predict the outcomes. "We see proposals, but it's hard to determine what will actually happen," Powell told the Senate Banking Committee during his semiannual testimony.

Regarding the Fed's policy, Powell reiterated his previous stance. "Given that our policy is now significantly less restrictive and the economy remains strong, there is no need to rush to adjust our approach," he said in his opening remarks.

The testimony also touched on financial regulation, with considerable discussion about efforts by Trump and his associate Elon Musk to dismantle or reform the Consumer Financial Protection Bureau (CFPB). Democrats used the opportunity to criticize Republicans, while a GOP senator suggested state banking regulators could still oversee the industry. Powell largely avoided commenting on the specifics, stating that the Fed’s role is to process payments for the CFPB and the U.S. Treasury.

When Senator John Kennedy of Louisiana asked whether the Fed had successfully achieved a "soft landing" of low inflation and steady growth, Powell responded cautiously: "It's not for me to say."

The Fed remains on hold, as it has been since its January meeting. Most analysts expect just one or two rate cuts in the year ahead.

On Wednesday, Powell will testify before the House Financial Services Committee, but before that, the Labor Department will release the latest inflation data, with economists anticipating a 0.3% rise in prices for January, keeping the annual rate at around 2.9%, still above the Fed's 2% target.

"The market is evaluating whether rates are too restrictive," said Venkat Balakrishnan, head of asset allocation at MissionSquare Retirement. "The unemployment rate quickly moved from 3.34% to 4.3%, but now it’s down to 4%. The Fed can afford to keep rates higher."

The unpredictable element is the economic agenda of the new administration. Trump has used proposed tariffs as leverage to secure what he perceives as favorable trade deals, especially with Mexico, Canada, and China. China has retaliated with tariffs of its own, and Trump is considering additional tariffs on the European Union and other nations in what he calls a “reciprocal” trade policy.

A potential trade war could disrupt global supply chains, as seen during the COVID-19 pandemic, leading to short-term inflation but possibly slowing growth in the long term. This comes as Trump begins deporting migrants, who have been an essential part of the labor force in recent years.