Fed Chair Powell will likely face tough questions - especially about the decision hold rates steady at the January FOMC meeting - at his semi-annual Humphrey-Hawkins testimony on Capitol Hill..
Since the FOMC, we have had the January PCE, NFP, inflation expectations, and tariff updates from US President Trump, but the market remains in show-me mode...
...significantly more hawkish than The Fed's Dot-Plot in the out years...
Recapping (via Newsquawk).
Trump initially imposed tariffs on Canada. Mexico, and China whilst sending a warning to Europe but later delayed tariffs on the former two by 30- days after chatting with their leaders.
On China, he announced an additional 10% tariff on top of existing levies on China, with no exclusions. He also has now announced fresh 25% tariffs on aluminum and steel from March 4th.
He will also be looking at tariffs on cars, pharmaceuticals, and chips and will hold meetings over the next four weeks, adding he will do reciprocal tariffs over the next two days.
He warned that tariffs on metals could go higher, and he does not mind if other countries retaliate.
On data, December PCE data was in line with expectations on both headline and core while the consumption data was above the consensus.
Meanwhile consumer inflation expectations have risen with the February UoM prelim estimate for the 1yr rising to 4 3% from 3.3%, while five year ticked up to 3.3% from 3.2%. The January’ NY Fed SCE saw the 1 and 3yr expectations unchanged at 3 0%. while the 5yr rose to 3.0% from 2 7%.
The NFP data saw a miss on the headline but offset by chunky two-month revisions. The unemployment rate dropped to 4.0% from 4 1%, while BLS revisions were not as bad as the prelim estimate and wages were above expectations - which will allow the Fed to remain patient before cutting rates.
Nonetheless, the data likely did little to alter the view of the Fed with Chair Powell already stressing a no rush approach to future policy changes particularly with uncertainty ahead due to new Trump policies.
On Trump policies, participants will continue to see how, and if, they affect the Fed and its policy decisions and if Powell has anything new to add but he will likely continue to reiterate uncertainty ahead.
However despite Trump continually pressing for lower rates, he did say the Federal Reserve was right to pause its rate-cutting path in its decision last week.
Further to this, US Treasury Secretary Bessent said he met with Powell and had a very constructive discussion so participants may look to see if the Chair makes any comments on this meeting.
As a reminder, at the latest meeting the FOMC kept rates unchanged as expected with the statement removing the language that "inflation has made progress towards the 2% goal, although Powell later claimed it was a language clean-up. used to shorten the sentence and was not meant to be viewed as a policy shift The Fed still sees inflation as "somewhat elevated".
Powell also said that the Fed does not need to be in a hurry to adjust the policy stance and policy is not on a preset course something he reiterated throughout the Q&A. even when asked about a March cut Further. Powell said the Fed got two good inflation readings in a row but sti wants to see further progress, but he thinks the Fed can see the pathway for that to happen particularly as shelter inflation is coming down pretty steadily.
Finally, a notable aspect of the Monetary Policy Report the Fed submitted to lawmakers is how rarely the word “tariffs” appears – even though the topic has been driving market volatility amid the flurry of trade-action announcements from President Donald Trump.
The 83-page MPR contains only two mentions of “tariffs” - neither in the context of domestic inflation - and no mention of “trade policy” or “Trump".
We take that as a signal that Powell will avoid saying tariffs are inflationary, or offering any concrete assessment about the president’s fiscal policies. Rather, he’ll likely repeat his usual answer – that the Fed doesn’t “speculate” about potential policies, and the ultimate effect of tariffs will depend on which goods from which countries are tariffed, and how those countries retaliate. Furthermore, we expect him to stick to the message that the economy is strong and the Fed can afford to hold rates steady.
Readers can watch the full testimony here live (we will drop the embed when it appears) and read the full prepared remarks.
