Powell reaffirms wait-and-see posture on rate cuts, citing solid economy

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.

Write to Nick Timiraos at Nick.Timiraos@wsj.com