Powell's testimony is coming this week! Rate cuts and new banking regulations are the focus of attention

According to the Zhitong Finance and Economics APP, Jerome Powell, the Chairman of the Federal Reserve, will deliver semi-annual monetary policy testimony to the U.S. Congress on Tuesday and Wednesday. Powell will face pressure from lawmakers who are increasingly urging the Fed to cut interest rates and are dissatisfied with the Fed's latest plan to increase capital requirements for Wall Street banks.

This hearing will be Powell's last public speech to Congress before the U.S. presidential election, and he may have to defend the Fed's policy stance of maintaining high interest rates for a longer period and its independence from politics.

In June this year, Fed officials lowered their expectations for interest rate cuts this year, indicating their plans to keep rates at a high level in 20 years, waiting for more evidence that inflation is returning to the 2% target. Powell reiterated this information last week and refused to specify when rate cuts might begin.

Recent data shows that the Fed's favored inflation gauge slowed in May after a bumpy start to the year. Another indicator scheduled to be released on Thursday is expected to show the smallest monthly increase in underlying inflation since August last year.

However, the U.S. labor market is also cooling, with some Fed officials warning of further slowdown risks. While job growth in June was robust, it was mainly concentrated in healthcare and government sectors, with employment data for the previous months revised downward. The unemployment rate rose to 4.1%, the highest level since the end of 2021.

Calls for Rate Cuts

Democrats urging rate cuts argue that rising borrowing costs are hurting consumers already hit hard by high prices. As inflation remains the top concern for voters, the question of whether and when to cut rates is becoming a hot topic ahead of the November presidential election in the U.S.

At Tuesday's Senate Banking Committee hearing, Senator Elizabeth Warren may urge Powell to cut rates. Last month, she and Democratic colleagues wrote to Powell requesting the Fed to follow the European Central Bank in easing monetary policy.

Other Democrats are more cautious to avoid being accused of interfering with the Fed's independence. Reports suggest that if former President Donald Trump wins the election, he may seek to limit the Fed's power.

Representative Jim Himes will hear Powell's remarks at the House Financial Services Committee on Wednesday. He stated that no member of Congress should pressure the Fed to raise or lower interest rates.

The Democratic representative from Connecticut said, "One of the cornerstones of a stable economy is independent monetary policy, and if we start mixing electoral politics and monetary policy, the other side will do the same, and soon our economy will be unstable."

Others argue that the calls for rate cuts are more based on economic assessments rather than politics.

Representative Brendan Boyle said, "Our argument is based on data and what we believe the data reflects." Despite the overall strong economy, "I think the concerns about the economy slowing down currently outweigh the concerns that inflation has not yet fully dropped to 2.0%." This Pennsylvania Democrat also expressed concerns about the US real estate market. Mortgage rates in the US are almost double what they were before the pandemic, making it difficult for people to afford homes and causing those who want to move to hesitate to sell their homes.

This aligns with the views of some economists who believe that the Federal Reserve does not need to suppress economic growth.

"We are very close to the target. All trend lines look good," said Mark Zandi, Chief Economist at Moody's Analytics. He called for the Fed to start cutting interest rates immediately, partly because the persistently high inflation rate above 2% is largely due to lagging rental indicators.

As the election approaches, interest rate cuts may become increasingly complicated, Zandi said: "Although policymakers really do not want to be influenced by current politics, they are almost certain to be influenced."

New Banking Regulations

Powell may also face sharp questions as the US plans to require Wall Street banks to set aside more capital. It is understood that a proposal issued by US regulators in July last year requires the eight largest US banks to increase their capital by about 19% to cushion financial shocks. In March this year, Powell said he expected the proposal to undergo "broad and significant changes."

Republicans, including House Financial Services Committee Chairman Patrick McHenry, criticized the initial plan. In September last year, McHenry and other Republican lawmakers urged regulators to withdraw the proposal, citing "fatal flaws" that could pose risks to the financial system.

Powell did not disclose whether the Fed, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency would abandon the initial plan. However, Fed officials recently presented a three-page document to other US regulators listing potential modifications to the reform in the plan that would significantly ease the burden on large banks.

Senator Warren recently accused Powell of giving bank executives too much influence over the proposal, signaling that Powell may face more scrutiny on Tuesday.

Powell reiterated that the Fed does not consider political factors when formulating policies.

Powell said last week: "I do believe that support for the independence of the Federal Reserve is very high, and that is important for Congress, both parties, leaders, and most people. So I am concerned about whether we can do the job well."