What To Expect From Fed Chair Powell's Testimony in Congress This Week

Why have borrowing costs for mortgages and other loans stayed so high for the past two years, and when might they start to come down? 

The man best equipped to answer those questions, Federal Reserve chair Jerome Powell, is set to testify before Congress Tuesday and Wednesday, where he’ll be grilled by some of the biggest critics of the central bank’s ongoing policy of holding interest rates high to push down inflation.

Here’s what to expect from Powell’s scheduled testimony. 

Powell’s Report Will Highlight Fed’s Tightrope Act

Powell will appear before the Senate banking committee on Tuesday, and the House finance committee on Wednesday. In both appearances, he will deliver the Fed’s twice-yearly report on monetary policy, released last week.

The report, which echoed recent comments from Fed officials in various public appearances, noted the balancing act that the central bank’s policy committee faces as it attempts to control inflation. If the Fed gets monetary policy wrong, it could stoke inflation, or cause a recession, both of which would be painful for everyday households.

By keeping the influential fed funds rate at its current level, a 23-year high, the Fed is making mortgages, auto loans and other debt costlier in an attempt to discourage borrowing and spending and push inflation down to a 2% annual rate from its current level of just under 3% (depending on how it’s measured.) 

Higher rates put more pressure on inflation by dragging down the economy. The risk of the strategy is that the economy could slow down too much and fall into a recession complete with mass layoffs—an outcome that’s so far been avoided, to the surprise of many economists. 

Fed Remains Data Dependent On When To Cut Rates

The Fed is poised to start reversing its campaign of anti-inflation interest rate hikes, which began in March 2022, and which has helped bring inflation down from its peak of 9.1% that year. Powell and other officials have said they’re monitoring data on inflation and other economic indicators to decide when to start cutting rates.

“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” the Fed said in the report. “Reducing policy restraint too soon or too much could result in a reversal of the progress on inflation. At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment.”

In public remarks last Tuesday, Powell declined to say when rate cuts would come, and repeated his refrain that the decision would be guided by incoming data. 

Since then, the Fed has gotten a major data point to digest: a report on the labor market showing that in June, unemployment rose to 4.1%, its highest since 2021. The hearings will be an opportunity for Powell to say how he is interpreting that data, and how rising unemployment might influence rate decisions.

Senators May Press Powell To Cut Rates

The hearings are a chance for lawmakers to pressure the Fed and attempt to influence the central bank’s policy moves, despite the fact that the Fed is supposed to operate independently from political pressure. 

Committee member Elizabeth Warren, a Democrat from Massachusetts, has been critical of the Fed’s rate-hike campaign since the outset, and has sparred with Powell over high interest rates in the past. In a letter last month, Warren together with fellow Democratic Senator Jacky Rosen of Nevada urged Powell to cut the fed funds rate sooner rather than later.

Warren’s letter noted that the rate hikes have pushed up borrowing costs on mortgages, hurting the ability of Americans to afford homes.

“Housing-related inflation is directly driven by high interest rates: reducing rates will reduce the costs of renting, buying, and building housing, lowering Americans’ single highest monthly expense,” the senators wrote.

Powell Could Face Scrutiny On Banking Regulations

Powell may also get tough questions from the other side of the political aisle, from Republicans who are critical of the central bank’s role as a banking regulator. 

Republicans have criticized proposed regulations that would require banks to hold more capital, reducing the risk of bank failures. Last July, the Fed along with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency proposed rules that would require banks to hold 16% more capital than they currently do.

The measure is heavily opposed by the banking industry and its allies. Critics say the rules would push banks to give out fewer loans to individuals and small businesses, and charge higher interest rates when they did lend money. 

In March, Powell told lawmakers he expected the rule would undergo “broad and material changes” before being finalized.