Powell speaks on Capitol Hill this week with politics front and center

Federal Reserve Chair Jerome Powell heads to Capitol Hill this week, facing increasing pressure both from outside and inside the central bank to start the push for lower interest rates.

Powell’s semiannual testimony to Congress kicks off Tuesday morning, as the central bank leader presents the Fed’s monetary policy report to the House Financial Services Committee. He then heads to the Senate Banking Committee on Wednesday.

Generally, the congressionally mandated sessions allow the Fed chair to drop some basic comments about the state of the economy and monetary policy. Legislators then get a chance to ask questions, which occasionally can turn hostile but are rarely anything severe.

But the backdrop to this appearance is different: Not only President Donald Trump but also multiple White House officials have cranked up the heat on Powell to start lowering rates, and now he’s faced with two key Fed officials who have spoken out in recent days to say they likely will favor a cut as soon as July.

That combination of factors has Wall Street buzzing with the possibility that the normally politics-free Federal Open Market Committee is now seeing some of its protective cover erode.

“There’s some political influence starting to come into the FOMC,” Mohamed El-Erian, chief economic advisor at Allianz, said Monday on CNBC.

El-Erian’s comments came shortly after Fed Governor Michelle Bowman said during a speech in Prague that she could see a case for starting to ease policy next month so long as inflation data stays in line.

Coupled with similar remarks Friday on CNBC from Governor Christopher Waller, there would appear to be at least some pushback against Powell’s repeated statements last week that policy is well-positioned for a more patient approach as tariff impacts play out.

What’s more, Waller and Bowman both are Trump appointees dating from his first term in office, and both have been mentioned as potential candidates to succeed Powell next year.

“Now suddenly we’ve had two Republican-leaning governors who came out with this notion of July, and they’ve moved the market,” El-Erian said. “What I do know is that Jay Powell is going to have a lot of difficulty trying to get everybody unified on a message.”

Indeed, traders have upped the odds of a July cut to about 23%, and a much more definitive 82% behind a September move, according to the CME Group’s FedWatch gauge of futures pricing.

More immediately, Powell could have a contentious two days ahead of him as he tries to explain the Fed’s position in the face of what could be some antagonism on both side of the congressional aisle. Following Trump’s lead, Republicans are likely to quiz Powell on what the hold-up is for easier monetary policy, while liberal Sen. Elizabeth Warren (D-Mass.) has been urging Powell to cut as well.

The trouble with Trump’s call

However, Trump’s desire for dramatic cuts — he has suggested at least 2 percentage points’ worth — are unlikely to materialize, either.

In his CNBC interview, Waller said he wants to “start slow” with cutting. At last week’s FOMC meeting, participants suggested that the end point, or terminal rate, for the fed funds rate would be around 3%, which is just 1.25 percentage points below the current level.

Beyond that, such dramatic moves could be counterproductive.

When the Fed cut by a full percentage point from September through December of last year, Treasury yields actually moved higher, almost in tandem with the reductions, as bond market investors priced in the potential for faster economic growth and higher inflation.

“The idea that the Fed does something and there’s immediate transmission and everything works exactly the way it’s supposed to work is just a myth,” said Jai Kedia, a research fellow at the Cato Institute, a libertarian think tank. “You know, people way overvalue the Fed’s effect on the economy, especially in an immediate kind of manner.”

Nevertheless, the administration is demanding immediate action from Powell, notwithstanding that the chair is just one of 12 voters on the committee that sets interest rates.

Bill Pulte, director of the Federal Housing Finance Agency, posted Monday on X that momentum is “building for Powell’s immediate resignation” — which Trump has not called for — adding that “it is clear that Powell’s political bias against our great President needs to be looked at.”

The Fed’s mission

Kedia, though, said the White House’s demand for dramatic action from the Fed is irresponsible.

For one, he said reducing federal borrowing costs isn’t the Fed’s job.

“The Fed’s mandate is actually to stabilize inflation and stabilize employment,” Kedia said. “We can debate whether it should have that mandate, or how successful it’s been in doing that, but if you put it in charge of the federal debt, you may as well kiss that mandate goodbye.”

Like El-Erian, Kedia does believe the Fed could start cutting rates, though market pricing favors September rather than July for the first move. FOMC members were split at last week’s meeting over the path and extent of cuts.

Kedia said that if Powell and the rest of the FOMC consider following a course that Trump is trying to push, it risks losing the economy as well as its reputation.

“Now I do think that the rates are slightly too high, but the reason to cut rates is basically if you’re following a monetary policy rule, or you’re looking at guidance from the macro economy, none of which will tell you that you have to reduce rates by as much as President Trump wants them to be reduced by,” he said. “A good economic case can be made that the Fed should cut rates, but that’s got nothing to do with the political aspect.”