Will Powell Signal Trouble? S&P 500, Gold, and Dollar Face Big Test

Powell’s Congressional Testimony to Set Market Tone Amid Tariff Concerns

Federal Reserve Chair Jerome Powell begins his semi-annual testimony before Congress today, delivering a key update on monetary policy. Traders will closely scrutinize his remarks for signals on inflation, interest rates, and the Fed’s stance on President Trump’s renewed tariffs. Powell appears before the Senate Banking Committee today and the House Financial Services Committee on Wednesday, just ahead of key Consumer Price Index (CPI) data that could further shape market expectations.

Inflation Remains Key as Fed Holds Rates Steady

The Fed has kept its benchmark interest rate at 4.25%-4.5% after cutting rates by 100 basis points between September and December. However, inflation remains above the 2% target, and traders are eager to see if Powell signals a shift in policy. The latest CPI data, due Wednesday, could impact market sentiment and influence Powell’s tone.

Interest rate futures currently reflect just over a 50% probability of at least one cut by mid-2025. If Powell signals concern about inflation persistence, expectations for rate cuts could be pushed further into the year, affecting Treasury yields and equities.

Tariff Threats Add Complexity to Fed’s Policy Path

A major wildcard for inflation and monetary policy is the Trump administration’s tariff plans. The White House has announced a 25% tariff on steel and aluminum imports, additional barriers on China, and potential trade restrictions on Mexico and Canada. These moves could reignite price pressures, forcing the Fed to delay or rethink its rate-cut plans.

A Reuters poll found nearly 60% of economists believe tariffs have increased inflation risks. If Powell acknowledges this concern, markets could react with higher Treasury yields, a stronger dollar, and downward pressure on equities, particularly in rate-sensitive sectors.

Powell to Defend Fed’s Independence Amid Political Pressures

Beyond inflation and trade policy, Powell may face scrutiny over the Fed’s independence. Former President Trump has criticized Powell’s decisions and suggested increasing White House influence over monetary policy. While Powell has defended the Fed’s autonomy, any signs of political interference could unsettle markets.

Regulatory matters, particularly the Basel III Endgame capital requirements for large banks, may also come up. Lawmakers, including Senator Elizabeth Warren, have raised concerns over the Fed’s supervisory role, adding another layer of uncertainty.

Market Forecast: Traders Bracing for Volatility

Markets could see significant swings depending on Powell’s tone. A hawkish approach—emphasizing inflation risks from tariffs and a strong labor market—could drive Treasury yields higher, strengthen the dollar, and weigh on equities. A more dovish stance, focusing on patience and economic uncertainty, could boost risk assets, weaken the dollar, and support gold prices.

With Powell balancing inflation risks and economic growth, traders should prepare for heightened volatility as markets react to his testimony and upcoming CPI data.

More Information in our Economic Calendar.