The latest numbers show the US economy is falling off a cliff, and Jerome Powell is now heading to Capitol Hill with the entire Federal Reserve on the defensive.
According to The Conference Board, the Leading Economic Index (LEI) dropped by 0.1% in May, its sixth monthly decline in a row, and it’s now down 16% from its highest point, hitting its lowest level in nine years.
Over the past six months, the index has been falling at an annualized pace of around 5%, which crosses the red line that usually signals a coming recession.
Out of the last 39 months, the index has gone down in 37. That’s one of the worst patterns on record, and every time something like this happened since 1960, the US ended up in a recession.
Now Powell is scheduled to testify before Congress on Tuesday and Wednesday, starting with the House Financial Services Committee, then the Senate Banking Committee. These sessions are routine by design, but this one isn’t normal.
The Fed is under political heat not just from the White House, but from inside the Fed itself. President Donald Trump and his administration are pushing hard for rate cuts, and now two Fed officials, Michelle Bowman and Christopher Waller, have also gone public with their support for cuts starting as early as July.
Bowman and Waller break ranks as pressure mounts on Powell
Bowman, speaking in Prague, said she saw a case for easing policy next month, if inflation data doesn’t spike. Waller backed her on CNBC, saying he supports a cautious approach to lowering rates. Both were appointed by Trump during his first term and are now being floated as possible replacements for Powell next year. Their sudden push for cuts has shaken the Fed’s unified front and sent markets adjusting expectations fast. The CME Group’s FedWatch tool now puts the chance of a July rate cut at 23%, with an 82% probability of a cut in September.
Mohamed El-Erian, chief economic advisor at Allianz, told CNBC on Monday, “There’s some political influence starting to come into the FOMC.” He said the fact that two governors openly backed July cuts, both being Republican-aligned, was no coincidence.
“Now suddenly we’ve had two Republican-leaning governors who came out with this notion of July, and they’ve moved the market,” he said. “What I do know is that Jay Powell is going to have a lot of difficulty trying to get everybody unified on a message.”
Trump allies want faster cuts while Powell sticks to patient stance
From the outside, Trump and several of his officials want dramatic rate cuts, at least two full percentage points. That’s not going to happen. Waller himself rejected that idea, saying, “I want to start slow.” Even the Fed’s most recent projections place the end-point rate around 3%, only 1.25 points below the current level.
If the Fed cuts too fast, it could backfire. When it cut by a full point between September and December last year, bond yields actually rose, because traders thought growth and inflation would rise too.
Jai Kedia, a research fellow at the Cato Institute, said the idea that rate cuts immediately help the economy is wrong. “The idea that the Fed does something and there’s immediate transmission and everything works exactly the way it’s supposed to work is just a myth,” he said. “You know, people way overvalue the Fed’s effect on the economy, especially in an immediate kind of manner.”
Meanwhile, Bill Pulte, who leads the Federal Housing Finance Agency, posted on X Monday that momentum is “building for Powell’s immediate resignation,” claiming “it is clear that Powell’s political bias against our great President needs to be looked at.” Powell hasn’t responded, but the Fed chair is just one of 12 voters on the rate-setting committee, and right now, he doesn’t seem to have the whole team on the same page.
On the other side of the aisle, Senator Elizabeth Warren has also been calling for a rate cut. During this week’s hearings, Powell will likely face questions from both parties. Republicans demanding to know why rates haven’t come down, and Democrats urging him not to wait.
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