Federal Reserve Chair Jerome Powell’s testimony this week put a spotlight on something that’s been looming over the economy for months: tariffs. While the market has mostly been focused on inflation readings, job data, and rate-cut hopes, Powell’s remarks before Congress reminded everyone that trade policy is a real, active risk. Specifically, he called out how new and proposed tariffs could complicate the path to stable inflation – and by extension, delay the Fed’s long-awaited pivot toward lower interest rates.
For investors looking ahead, Powell’s tone was more cautious than many expected. Here’s what he said, why it matters, and how it could influence everything from rate cut timelines to stock valuations over the next few months.
Powell’s Message: “Not There Yet”
Speaking to lawmakers during his semiannual testimony, Powell was upfront: inflation has cooled compared to 2022 and 2023, but recent tariff pressures may threaten that progress. He didn’t say rate cuts are off the table – but he made it clear the Fed won’t be rushed.
“We’re watching carefully,” Powell told the House Financial Services Committee. “Tariffs raise costs. And when that happens across key sectors like manufacturing, autos, and consumer goods, it shows up in the data – and in the prices consumers pay.”
Powell noted that while recent inflation prints have shown improvement, they still aren’t low or steady enough for the Fed to act with confidence. The possibility of rising costs due to new trade policies – especially those being floated by the White House – adds an additional layer of uncertainty.
This isn’t the first time tariffs have entered the inflation conversation. But Powell’s comments marked a significant shift in how seriously the Fed is taking them as a near-term threat.
A Cautious Fed: No July Cut?
Markets had been betting on a potential rate cut as early as the July FOMC meeting. After all, CPI data from May showed inflation softening, and economic growth hasn’t exactly been red-hot. But Powell poured cold water on that outlook.
He didn’t rule out a cut in July, but he also didn’t offer any strong signals. Instead, he emphasized the need to wait and see how upcoming data – particularly the June CPI and PCE inflation numbers – shake out.
That wasn’t what Wall Street wanted to hear. Futures markets have since trimmed the odds of a July cut to below 30%. Some traders are now pushing their bets out to September or even November.
From Powell’s perspective, it’s all about “not making a mistake.” Cut too soon, and the Fed risks reigniting inflation. Wait too long, and the economy might slow more than needed. Right now, the data (and the tariff talk) suggest that caution is the smarter move.
How Tariffs Could Complicate Inflation
Let’s talk about the tariff issue itself. President Trump has been vocal about reimposing trade barriers, and several proposals are already in motion targeting imports from China, Mexico, and parts of Europe.
While these policies are meant to protect domestic industries, they also tend to raise prices – at least in the short term. If companies face higher costs for inputs like steel, semiconductors, or agricultural goods, they usually pass those costs along to consumers.
Powell said as much during his testimony, noting that recent import and producer price trends suggest tariffs could begin affecting inflation “over the next couple of months.”
He also pointed out that businesses are increasingly factoring tariff scenarios into their planning and pricing models. That means even the threat of tariffs – whether they’re passed or not – can create enough uncertainty to delay investment and hiring decisions.
Market Reactions: Tech, Bonds, and More
The reaction in markets was muted but telling. Yields on 10-year Treasurys TLT–0.16% climbed slightly as traders dialed back their rate-cut expectations. Equities were mixed – tech names dipped, while energy and consumer staples gained on safe-haven demand.
The Nasdaq QQQ+0.11%, which has been on a tear thanks to AI enthusiasm and strong earnings, slowed its momentum after Powell’s testimony. Rate-sensitive sectors like real estate and utilities also underperformed.
The dollar DXY–, meanwhile, remained strong. Investors are betting that a cautious Fed means higher yields for longer, which tends to support the greenback – especially compared to currencies in regions where rate cuts have already begun (like the EU or Canada).
What to Watch Next
So what comes next? Investors should keep an eye on a few key developments:
- June CPI and PCE Reports
If inflation continues to ease, it could counterbalance Powell’s tariff worries. But if input prices start to creep up, the Fed’s caution will look increasingly justified. - Trade Announcements
Any new tariffs – or even just political statements – will be scrutinized for economic impact. Look especially at what the White House signals in July regarding China and Mexico. - Fed Minutes and Public Remarks
Additional comments from Fed governors and regional bank presidents will help shape expectations. If Powell’s caution is echoed broadly, markets may fully price out July. - Corporate Earnings Season
Pay attention to what companies say about cost pressures. If input costs are rising – especially for manufacturers, retailers, and import-heavy businesses – it will validate Powell’s concerns.
Final Thought: Uncertainty Is the Point
If Powell’s testimony left investors with one takeaway, it’s that uncertainty itself is now policy-relevant. The Fed isn’t just reacting to hard data anymore. It’s also watching political moves, tariff negotiations, and global trade signals – things that aren’t always predictable but can still affect inflation and rate paths.
For now, the Fed is standing still, but with eyes wide open. That makes the next few months critically important for rate watchers, equity traders, and anyone trying to forecast the macro landscape. The message from Powell? Be patient – and be careful.
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