Jay Powell has defended the Federal Reserve’s authority over US monetary policy, as he vowed to “focus on the data” and avoid wading into politics despite calls from the White House and some lawmakers to cut borrowing costs.
The Fed is facing the fiercest challenge to its independence to set interest rates since the 1980s, with Donald Trump claiming during his first week back in the White House that he understood monetary policy better than the central bank. Trump has also said borrowing costs should be lower.
Fed chair Powell told lawmakers on the Senate’s banking committee on Tuesday that the central bank stood a better chance of keeping prices under control if it remained above the fray — and was in turn left to get on with its job of setting interest rates free from political interference.
“We’ll make better policy, we’ll keep inflation lower, if we just focus on doing our job and stay out of politics, stay out of elections, and don’t try to favour or hurt any political party, or any political filter and just try to focus on the data,” Powell said in his first appearance before the influential committee since Trump returned to the presidency. “If we start putting up political filters, we’ll be less effective at our already quite difficult job.”
Powell was adamant that any decision by Trump to sack one of the seven members of the Fed’s board of governors was “pretty clearly not allowed under the law”.
The remarks come as some Democrats are concerned that the Fed is already responding to Republican pressure.
Democratic senators at the hearing cited the Fed’s plans to revisit rules on so-called stress tests for the country’s biggest banks, the departure of its chief supervisor Michael Barr from that role and its decision to quit the Network for the Greening of the Financial System as evidence that it was succumbing to Republican attacks.
However, Powell made clear on Tuesday that when it came to monetary policy, the Fed would not respond to pressure from the new administration and lawmakers on both sides of the aisle to cut interest rates fast.
The Fed chair reiterated that strong growth meant rate-setters were “not in a hurry” to reduce borrowing costs lower than their current level of between 4.25 per cent and 4.5 per cent.
In a hearing dominated by Democrats’ concerns over the Trump administration’s gutting of the Consumer Financial Protection Bureau and Republican claims that many right-leaning Americans are being debanked owing to their political leanings, Powell refused to be drawn on what the economic consequences of the president’s actions might be.
“It really does remain to be seen what tariff policies would be implemented. It would be unwise to speculate when we really don’t know. We see proposals, but it’s so hard to say what will happen,” said Powell. “It’s really not just tariffs. It’s tariffs, immigration, fiscal policy and regulatory policy. We’ll try to make sense of it and do what’s right for monetary policy.”
John Williams, president of the New York Fed, also on Tuesday signalled rate-setters would need to wait and see how economic conditions evolved before deciding whether to cut rates.
While borrowing costs were still “modestly restrictive”, Williams said the outlook was “highly uncertain, particularly around potential fiscal, trade, immigration and regulatory policies”.