Fed chair to face grilling from Congress

Federal Reserve chair Jerome Powell is set to face a grilling from Congress, with politicians likely to demand why interest rates haven't been cut yet.

But while lawmakers on both sides of the aisle are growing exasperated with how the target range remains stuck at 5.25% to 5.5%, some will be wary of undermining the central bank's independence, with Donald Trump eyeing greater influence should he win in November.

Traders and analysts alike will be paying very close attention to what Powell has to say, and looking for clues that a long-awaited cut could take place when the Federal Open Market Committee meets in either July or September.

Powell will appear before the Senate Banking Committee and the House Financial Services Committee in quick succession—delivering his twice-annual update on the current state of the U.S. economy. Significantly, this will also be the last time he's questioned on Capitol Hill before the election takes place in the fall.

It'll be interesting to see whether last week's job numbers, which saw the unemployment rate creep up to 4.1%, will have changed Powell's perspective on cutting sooner rather than later. But there's also a high possibility that he won't deliver any definitive answers for fear of preempting the FOMC's next meeting on July 30.

The Fed submitted a report to Congress last week ahead of Powell's testimony, which described inflation's progress back to a target level of 2% as "modest."

It noted that the cost of housing, which has been dragging this figure up, "should gradually decline, though much uncertainty remains about the extent and timing."

Democratic Senator Elizabeth Warren wrote to Powell last month and urged the Fed to cut interest rates with a matter of urgency.

"The Fed's monetary policy is not helping to reduce inflation," she wrote alongside colleague Jacky Rosen. "Indeed, it is driving up housing and auto insurance costs—two of the key drivers of inflation—threatening the health of the economy and risking a recession that could push thousands of American workers out of their jobs. You have kept interest rates too high for too long: it is time to cut rates."

Predictions for the future

The report to Congress also provided longer-term predictions from FOMC members on how interest rates and core PCE inflation, the Fed's preferred metric for measuring the cost of living, will evolve over time.

Core PCE inflation, which excludes the cost of food and energy from its calculation, is now only expected to fall to 2% in 2026.

Meanwhile, it's now expected that the federal funds rate will be at 5.1% by the end of 2024 and 4.1% in 2025—higher than March's previous projections of 4.6% and 3.9%, respectively. The forecast for 2026 remains unchanged at 3.1%.

The considerable deviations seen in the space of just four months help underline how uncertain the economic picture is—and how crucial incoming data over the next few weeks will be in shaping the FOMC's next move.

After facing criticism that it was too slow to act when inflation started surging, the Federal Reserve will be keen to prevent missteps that could undo the progress made so far. Cutting too quickly may cause inflation to heat up once more, while an excessive delay could tip the economy into recession.