Semiannual Monetary Policy Report to the Congress

Powell plays it safe: careful policy recalibration, no politics

• Federal Reserve Chair Jerome Powell’s semiannual Monetary Policy Report to Congress was largely consistent with recent Fed communication. He highlighted the solid state of the US economy, characterized by a robust, yet balanced and noninflationary labor market, and inflation closer to the 2% target but still somewhat elevated.
  
  
• Powell reiterated that, with monetary policy significantly less restrictive and the economy still strong, the Federal Open Market Committee (FOMC) is in “no hurry” to adjust its policy stance.
  
  
• Fed policymakers continue to view labor market conditions as providing them the luxury of time to further ease monetary policy. Although we forecast a deceleration in inflation and a cooling of labor market conditions in the coming months, we believe the Fed will maintain a wait-and-see approach. We expect only two Fed rate cuts, in June and December.

As he did during his post-FOMC press conference, Powell emphasized that the FOMC remains in a “wait and see” mode, closely monitoring regulation, trade, tax and immigration policy changes. On tariffs specifically, he noted it was too early to estimate the economic impact of recently announced or implemented measures.
 

He confirmed that the Fed will adopt a reactive approach, with policymakers relying heavily on inflation and employment data to guide decisions. As we’ve noted before, this could lead to the risk of over-extrapolating short-term trends.
 

In his testimony, Powell stated that inflation expectations “appear to remain well-anchored.” While this aligns with the New York Fed’s inflation expectations survey, it contrasts with the more volatile University of Michigan Consumer Sentiment inflation expectations, which surged in early February. While we view the New York Fed’s gauges as superior, it’s worth noting that market-based inflation expectations have also risen recently, with the implied five-year spot inflation rising to 2.6% — its highest since early 2023.
 

Powell underscored the Fed’s commitment to completing Basel III Endgame, emphasizing its importance for US banks and the broader economy. And he added that the level of capital in the largest US banks is “about right.”
 

The Fed Chair told lawmakers that the federal budget is on an unsustainable path, and “there is no time like the present to start working on this.” This comes as Congress is exploring way to reconcile border, energy and tax priorities while managing budget deficits.
 

Still, Powell was careful to maintain the Fed’s neutrality on fiscal policy. He noted that the Fed acts as the Treasury Department’s fiscal agent, processing federal payments on its behalf, but does not make decisions related to outgoing government payments. He stated, “We make no judgments whatsoever. Those are all made upstream from us.”