By Nick Timiraos

Federal Reserve Chair Jerome Powell is set to tell lawmakers on Tuesday that the central bank remains focused on making sure any one-time increases in prices from higher tariffs won't turn into an "ongoing inflation problem."

Powell said little in prepared remarks to tee up a rate cut next month. Instead, he said solid economic activity in recent months meant officials could carefully study inflation and employment data to determine whether and when the central bank resumes lowering interest rates following a pause that has so far lasted for six months.

"For the time being, we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance," Powell said in remarks prepared for delivery later Tuesday before the House Financial Services Committee. Powell is set to testify on Capitol Hill over two days.

Powell's testimony follows an interval of unusually harsh public criticism from President Trump, who on Friday pleaded on social media for the Fed board to "override this Total and Complete Moron!"

The hearings could serve as a key test for whether lawmakers, particularly Republicans, add to political pressure for lower rates or, instead, defend the central bank's longstanding prerogative to set interest rates with an eye on ensuring stable long-term growth.

Fed officials held their short-term benchmark rate steady last week in a unanimous decision. But a rift is opening up.

A few have concluded that tariffs will have only modest effects on prices and want to resume rate cuts soon. If tariffs hit profit margins instead of prices, they could slow the economy and risk higher unemployment. Others want to stay on hold for longer because they aren't sure of this and want to see more data.

The Fed is trying to see how the dust will settle from the aftereffects of Trump's April 2 "Liberation Day" tariff announcements, among other policy changes. Most economists expect tariffs to lift prices over the coming months.

"The effects on inflation could be short lived -- reflecting a one-time shift in the price level. It is also possible that the inflationary effects could instead be more persistent," Powell said.

Avoiding that second outcome depends on how large the tariffs are, how long it takes cost increases to filter through supply chains, and whether consumers and businesses expect inflation to remain low after that, Powell said.

Two Fed officials appointed by Trump, Christopher Waller and Michelle Bowman, have in recent days indicated they could support lowering rates as soon as the Fed's next policy meeting at the end of July. Waller and Bowman said they expect tariffs will lead to a small, one-time increase in prices that won't generate higher inflation beyond the next year.

Fed officials will have one more inflation and employment report before the July meeting.

Other policymakers have indicated they could support lowering rates at the meeting after that, in September, if incoming data points to softer labor-market conditions or more muted price pressures.

Still others have signaled far greater caution about lowering interest rates as businesses are looking to push on higher costs from tariffs to their customers. They are concerned that after four years in which inflation has run above the Fed's 2% goal, customers and businesses may be more tolerant of price increases, which could in turn lead to higher levels of inflation.

New economic projections released last week revealed this widening divide in rate-setters' expectations, with 10 officials penciling at least two rate cuts this year and seven penciling in no cuts. Two others wrote down one cut. The Fed has four more scheduled policy meetings this year.

Powell’s Testimony Full Transcript:

Semiannual Monetary Policy Report to the Congress

Chair Jerome H. Powell

Before the Committee on Financial Services, U.S. House of Representatives

Chairman Hill, Ranking Member Waters, and other members of the Committee, I appreciate the opportunity to present the Federal Reserve's semiannual Monetary Policy Report.

The Federal Reserve remains squarely focused on achieving our dual-mandate goals of maximum employment and stable prices for the benefit of the American people. Despite elevated uncertainty, the economy is in a solid position. The unemployment rate remains low, and the labor market is at or near maximum employment. Inflation has come down a great deal but has been running somewhat above our 2 percent longer-run objective. We are attentive to the risks to both sides of our dual mandate.

I will review the current economic situation before turning to monetary policy.

Current Economic Situation and Outlook
Incoming data suggest that the economy remains solid. Following growth of 2.5 percent last year, gross domestic product (GDP) was reported to have edged down in the first quarter, reflecting swings in net exports that were driven by businesses bringing in imports ahead of potential tariffs. This unusual swing has complicated GDP measurement. Private domestic final purchases (PDFP)—which excludes net exports, inventory investment, and government spending—grew at a solid 2.5 percent rate. Within PDFP, growth of consumer spending moderated, while investment in equipment and intangibles rebounded from weakness in the fourth quarter. Surveys of households and businesses, however, report a decline in sentiment over recent months and elevated uncertainty about the economic outlook, largely reflecting trade policy concerns. It remains to be seen how these developments might affect future spending and investment.

In the labor market, conditions have remained solid. Payroll job gains averaged a moderate 124,000 per month in the first five months of the year. The unemployment rate, at 4.2 percent in May, remains low and has stayed in a narrow range for the past year. Wage growth has continued to moderate while still outpacing inflation. Overall, a wide set of indicators suggests that conditions in the labor market are broadly in balance and consistent with maximum employment. The labor market is not a source of significant inflationary pressures. The strong labor market conditions in recent years have helped narrow long-standing disparities in employment and earnings across demographic groups.

Inflation has eased significantly from its highs in mid-2022 but remains somewhat elevated relative to our 2 percent longer-run goal. Estimates based on the consumer price index and other data indicate that total personal consumption expenditures (PCE) prices rose 2.3 percent over the 12 months ending in May and that, excluding the volatile food and energy categories, core PCE prices rose 2.6 percent. Near-term measures of inflation expectations have moved up over recent months, as reflected in both market- and survey-based measures. Respondents to surveys of consumers, businesses, and professional forecasters point to tariffs as the driving factor. Beyond the next year or so, however, most measures of longer-term expectations remain consistent with our 2 percent inflation goal.

Monetary Policy
Our monetary policy actions are guided by our dual mandate to promote maximum employment and stable prices for the American people. With the labor market at or near maximum employment and inflation remaining somewhat elevated, the Federal Open Market Committee (FOMC) has maintained the target range for the federal funds rate at 4-1/4 to 4-1/2 percent since the beginning of the year. We have also continued to reduce our holdings of Treasury and agency mortgage-backed securities and, beginning in April, further slowed the pace of this decline to facilitate a smooth transition to ample reserve balances. We will continue to determine the appropriate stance of monetary policy based on the incoming data, the evolving outlook, and the balance of risks.

Policy changes continue to evolve, and their effects on the economy remain uncertain. The effects of tariffs will depend, among other things, on their ultimate level. Expectations of that level, and thus of the related economic effects, reached a peak in April and have since declined. Even so, increases in tariffs this year are likely to push up prices and weigh on economic activity.

The effects on inflation could be short lived—reflecting a one-time shift in the price level. It is also possible that the inflationary effects could instead be more persistent. Avoiding that outcome will depend on the size of the tariff effects, on how long it takes for them to pass through fully into prices, and, ultimately, on keeping longer-term inflation expectations well anchored.

The FOMC's obligation is to keep longer-term inflation expectations well anchored and to prevent a one-time increase in the price level from becoming an ongoing inflation problem. As we act to meet that obligation, we will balance our maximum-employment and price-stability mandates, keeping in mind that, without price stability, we cannot achieve the long periods of strong labor market conditions that benefit all Americans.

For the time being, we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance.

To conclude, we understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We at the Fed will do everything we can to achieve our maximum-employment and price-stability goals.

Thank you. I am happy to take your questions.