Fed Chair Jerome Powell defended the central bank’s cautious stance on interest rates during day two of his Congressional testimony, citing significant uncertainty around the inflationary impact of tariffs. While Powell acknowledged tariff-driven price hikes could ultimately be transitory, he said Fed must prepare for the possibility that inflation proves more persistent. “As the people who are supposed to keep stable prices, we need to manage that risk,” Powell emphasized.

Powell emphasized that the Fed is operating in largely uncharted territory, warning that the magnitude of potential new tariffs dwarfs those imposed during Trump’s first term, and those earlier measures came when inflation was subdued. “There is not a modern precedent,” he said, cautioning against prematurely adjusting policy without a clearer picture of the economic impact.

“If it comes in quickly and it is over and done, then yes, very likely it is a one-time thing,” he said of tariff inflation. But if the Fed misjudges the situation, “people will pay the cost for a long time.”

Boston Fed President Susan Collins expressed her preference for what she termed an “actively patient” approach to monetary policy, saying it remains appropriate amid rising uncertainty. Speaking today, Collins pointed to the fluidity in tariff developments and broader government policy shifts, which she said “validate the careful approach” Fed has taken so far in 2025. While she still expects gradual policy normalization to resume later this year, she warned her view “could change significantly as events unfold”.

Collins emphasized that much hinges on the nature of the “price shock” driven by tariffs. If price pressures fade quickly without unanchoring inflation expectations, and if the hit to real activity remains limited, she said it could support easing later in the year. However, if those conditions are not met, policy adjustments may be delayed.

For now, Collins views current monetary policy as “modestly restrictive,” and well-positioned to deal with a range of potential outcomes.

Speaking overnight, Kansas City Fed President Jeff Schmid called Fed’s “wait-and-see” stance appropriate, especially given that inflation remains above target and the effects of rising tariffs are still filtering through the economy. “The resilience of the economy gives us the time to observe how prices and the economy develop,” he added

Schmid noted that business contacts “almost uniformly” expect tariffs to drive prices higher and weigh on activity, putting Fed’s inflation and employment mandates at odds. But “there is far less clarity on when and by how much,” said Schmid, who argued there’s little justification for near-term rate adjustments until the economic picture becomes clearer.

Fed Governor Michael Barr warned that the recent wave of tariffs is likely to drive inflation higher, citing the potential “Higher short-term inflation expectations, supply chain adjustments, and second-round effects”. Speaking overnight, Barr acknowledged that this could add to inflation persistence even as the broader economy slows and unemployment, currently at 4.2%, edges higher.

Despite these headwinds, Barr said the Fed is in a good position to “wait and see” how economic conditions evolve before adjusting policy. He noted the “considerable uncertainty about tariff policies and their effects,” stressing that monetary policy requires balancing “tradeoffs” between supporting growth and containing inflation.

New York Fed President John Williams warned overnight that the combination of policy uncertainty, restrictive trade measures, and declining immigration will drag significantly on the US economy this year. He projects growth will decelerate to just 1%, with unemployment rising to 4.5% by the end of 2025. Williams also anticipates a near-term spike in inflation to 3%, driven by tariffs, though he expects that to slowly subside back toward 2% over the next two years.

While Williams described the hard economic data as still solid, he acknowledged a growing disconnect with softer indicators that point to rising concerns among consumers and businesses. Nonetheless, he welcomed signs that inflation expectations remain anchored despite recent price shocks.

Looking ahead, Williams emphasized that monetary policy will be guided by data due “over the next few months,” which will inform whether and when Fed should adjust interest rates. Though he reiterated that “interest rates eventually need to get back to more normal levels”, his comments suggest a wait-and-see approach remains the most likely course for now.

Minneapolis Fed President Neel Kashkari reiterated Fed’s cautious stance overnight, emphasizing that policymakers remain in “wait and see mode” as they monitor the economic fallout from tariff policy. He noted that while officials are hesitant to make any “dramatic changes” to the policy outlook just yet, their priority is to gain clarity on how tariffs will impact inflation and broader growth dynamics.

Kashkari struck a generally optimistic tone on the domestic economy, saying the fundamentals remain “quite strong” and that inflation appears to be trending back toward the 2% target. He pointed to recent data suggesting underlying inflation is running near 2.5%, which—while still above target—is showing a welcome moderation.

However, the lingering uncertainty around tariffs continues to cloud the outlook. Kashkari warned that “nervousness” around trade is leading some firms to pause investment and may amplify inflation risks. While ongoing negotiations offer a path forward, he made clear that “ultimately we need to see what actually happens and then adjust our analysis of the economy.”

Cleveland Fed President Beth Hammack pushed back against the idea of early rate cuts, saying there’s little evidence yet to justify easing. “I don’t see a weakening in the economy that would merit imminent rate cuts,” she said. Hammack emphasized that risks from holding steady are low and that any adjustments should be cautious and measured.

She reiterated the value of patience in uncertain times, noting that the current stance could be maintained “for quite some time” before Fed considers modest cuts toward neutral.

“I would rather be slow and move in the right direction than move quickly in the wrong one,” she emphasized.

In his prepared remarks for Congressional testimony, Fed Chair Jerome Powell acknowledged that this year’s tariff increases are likely to both “push up prices and weigh on economic activity”. He noted that while the inflationary effects could be transitory, there’s also a risk that they become more persistent depending on the magnitude of pass-through and how firmly inflation expectations remain anchored.

Powell emphasized that Fed’s primary responsibility 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”.

He emphasized that “without price stability, we cannot achieve long periods of strong labor market conditions”.

Given the uncertainties ahead, Powell signaled that the FOMC remains in a wait-and-see mode, saying the Fed is “well positioned to wait” before making any policy changes.

Full remarks of Fed’s Powell here.

Atlanta Fed President Raphael Bostic pushed back against market hopes for a near-term rate cut in July, saying he remains cautious about inflation and sees little urgency to ease policy.

In an interview with Reuters, Bostic said he would prefer to hold rates in a restrictive zone “for longer just to be absolutely sure” inflation returns sustainably to the 2% target. While others have floated the possibility of a cut in July, Bostic said “I would see the last quarter is sort of when I would expect we would know enough to move.”

Bostic acknowledged that tariff-related risks have not yet materialized into a “doomsday scenario”, thanks to business adaptability. He said executives have grown more confident in managing price pressures, and are already preparing to raise prices in phases as a response to higher input costs.

That business strategy, he argued, is one of the key reasons he remains wary of easing too early, fearing that inflation momentum could persist. “They tell me ‘I’m pretty sure I am going to have to raise my prices. The question is not whether but when,'” he emphasized.