When Jerome H. Powell, chair of the Federal Reserve, last testified in front of Congress in July, he hailed the “considerable progress” the central bank had made in taming rapid inflation and set the stage for a pivot toward lower interest rates.
Mr. Powell confronts a far different economic and political landscape as he prepares to face lawmakers again on Tuesday and Wednesday. The Fed has paused its rate-cutting plans with inflation still above its target, and questions are swirling about how it will navigate the economic and institutional ramifications of tariffs and other policies that President Trump has put at the center of his presidency.
The semiannual hearings, which begin on Tuesday before the Senate Banking Committee, follow the Fed’s move into a new phase in its yearslong effort to tame price pressures. After lowering rates by a full percentage point last year, the Fed is in a holding pattern as it assesses how quickly to release its grip on the economy and ease borrowing costs.
Mr. Powell is likely to reiterate that a solid labor market has given the central bank latitude to be patient about its next steps, especially since progress toward its 2 percent inflation goal has recently been bumpy.
The incoming data have been slightly more reassuring, with price gains finally moderating in key sectors like housing. But sweeping proposals put forward by Mr. Trump that would affect immigration, tariffs and taxes have made the Fed’s job much more difficult.
The Fed, during Mr. Trump’s first trade war, did not respond to what it generally perceived as a one-off jump in prices stemming from tariffs. Instead, central bankers focused on souring business sentiment and a pullback in global demand, prompting it to lower rates in 2019 to shore up the economy.
The Fed could follow that same playbook this time. But much will depend on whether consumer and business expectations of future inflation remain in check. Because the backdrop is so different from 2018 — when inflation was too low — the fear is that Americans emerging from the worst shock to prices in decades will be more sensitive to additional increases.
Already there are signs that people are bracing for higher inflation. Expectations about what will happen in the year ahead have risen sharply, according to a preliminary survey published by the University of Michigan on Friday.
Short-term metrics like that tend to bounce around a bit, so Fed officials focus on longer-term expectations. A new measure released by the Federal Reserve Bank of New York on Monday showed year-ahead inflation expectations steadying in January, while those over a five-year horizon rose slightly.
The rules and regulations that govern Wall Street will also be a focus for lawmakers, given the numerous changes since Mr. Powell last testified. The central bank has paused any “major rulemakings” after its top Wall Street cop, Michael Barr, decided a month ago to step down as vice chair for supervision. He said he was relinquishing that role, but not his Fed governorship, to avoid a lengthy legal battle with Mr. Trump that he feared could damage the Fed.
Mr. Barr had faced intense pushback from Wall Street and some of his own colleagues for seeking to impose stricter rules on big banks. He was eventually forced to scrap his initial proposal and issue a new one with significantly less onerous requirements.
The Fed has also changed tack on the yearly stress tests it runs on the country’s largest banks to gauge their ability to withstand big economic and financial market shocks. In December, the central bank announced that it would consider “significant changes” to make the process more transparent, just a day before banking lobbyist groups sued the institution over the issue.
In a letter sent to Mr. Powell ahead of the hearings, which are scheduled to shift on Wednesday to the House Financial Services Committee, Senator Elizabeth Warren of Massachusetts joined Representative Maxine Waters of California in calling on the Fed to resist making those changes or risk allowing banks to “game the stress tests” in a way that could ultimately undermine the stability of the financial system.
“The changes sought by big banks — like previous rollbacks of banking rules — will come back to haunt families, small businesses and the economy, increasing the likelihood of another Wall Street-driven economic collapse,” said the letter, which was seen by The New York Times.
Ms. Warren, the ranking Democrat on the Banking Committee, and Ms. Waters, who serves in a parallel role on the Financial Services Committee, also made the case that the banks’ legal arguments “do not have merit” and suggested that they would not hold up if the Fed would “vigorously defend its clear legality in court.”
In a series of questions directed at Mr. Powell, they sought further clarity on the Fed’s decision to look into its stress testing framework and whether it would require banks to offset those changes by increasing the amount of money they must put aside as a financial cushion.
The confrontation comes amid apprehension about how the Fed is handling directives from the White House. The central bank operates independently of the executive branch and prizes above all its ability to make decisions on interest rates without interference.
“We are concerned that, instead of fighting against the banks in courts and elsewhere, the Fed is now — in the wake of President Trump’s election — seeking new avenues for premature surrender,” Ms. Warren and Ms. Waters said in their letter to Mr. Powell.
The issue of policy independence reared up during Mr. Trump’s first term as he consistently attacked Mr. Powell for resisting his demands to lower interest rates speedily enough. He has been more circumspect in his second term, even saying the Fed’s decision to pause rate cuts in January “was the right thing to do.”
On issues apart from its policy independence, the Fed has shown a clear willingness to align with the White House when it deems it is appropriate and lawful. Most recently, the Fed voluntarily complied with Mr. Trump’s executive order to halt hiring. The Fed has also scaled back on its diversity, equity and inclusion programs as well as public initiatives related to climate change — areas the Trump administration has railed against.
Still, Mr. Trump’s imprint on the Fed so far pales next to what other agencies have experienced. The Consumer Financial Protection Bureau, the federal government’s financial industry watchdog, was effectively shut down over the weekend, with its acting director, Russell Vought, ordering employees to cease working.
Mr. Vought, who leads the Office of Management and Budget, also cut off the consumer bureau’s funding, which originates from requests to the Fed. The central bank last transferred $245 million in January to cover a portion of the agency’s 2025 budget of around $800 million.