Federal Reserve Chair Jerome Powell testified in front of the Senate Banking Committee on Thursday, wrapping up a two-day appearance on Capitol Hill. The chair reiterated that the Fed will continue to review incoming inflation data and will most likely push back any rate cuts until the year's second half.

The Wall Street Journal Chief Economics Correspondent Nick Timiraos joins Yahoo Finance to discuss Powell's testimony and give insight into how the Fed balances its policymaking with political developments.

Timiraos explains that central bankers aren't driven solely by hard metrics: "They can consult monetary policy rules, like a table rule, which would say you probably are where you need to be right now, but you might need to be cutting soon, so maybe they're going off of that. You could go off an outlook or forecast if you think growth is going to slow more, which the Fed has had that in its forecast for quite a while, or you could go off of the data. In the past, the Fed has cut interest rates, because it sees something happening either in financial markets or in the economy that doesn't look very good. I think what we're all grappling with here, this could be a different situation."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

- Jerome Powell, the Federal Reserve chair, of course, testifying on Capitol Hill again today, this time, in front of the Senate Banking Committee. And it wraps up two straight days of congressional testimony from Powell. The central bank still expecting to cut rates later this year, he said, and makes-- will make broad changes to the Basel III Endgame as well. He sort of indicated that in surprise comments yesterday and today.

Joining us now, "Wall Street Journal's" Chief Economics Correspondent Nick Timiraos. Good to see you, Nick. Really, it's been an interesting couple of days, maybe even less on the inflation and interest rate front than on the Basel III front. But let's get to that in a moment because I do want to linger on the path for interest rates here. What kind of stood out to you on that front from Powell's testimony?

NICK TIMIRAOS: You know, it was fairly boring as it goes on monetary policy. And maybe that's OK because we've had a couple of pretty lively years here. I think the takeaways for me, it was more what Powell didn't say about inflation and interest rates than what he did say.

I mean, we did see strong numbers, both unemployment and inflation in January. And that was really not remarked upon by the chair. No one asked him about it. He didn't suggest that the fed was going to overreact to one month of data. But the markets did react a lot to that one month of data because they had been priced for perfection. I think there had been this view that the very cool core PCE readings of November and December would just continue. And that would allow the fed to cut more.

So it was more what Powell didn't say on that front. I thought his comments today about, you know, we aren't too far from having the confidence we need, that was notable. He didn't have to say that. And then his comments around the neutral interest rate back in September when it came up at the press conference, he said, well, we don't know where neutral is, we know it by its works.

And if you look at what the economy's done, Julie, since September, it's been strong activity, has been good. But today he said, we're far from neutral, we're well above neutral. And he didn't have to do that. So that was notable to my ear as well.

- Nick, when does the fed know when to cut? You know, a lot of viewers right now may think, well, central bankers or policymakers, they're just driven strictly by the hard data, hard metrics. But there is sort of, you know-- for lack of a better word, there is sort of an art to this as well, right?

NICK TIMIRAOS: It's difficult. I mean, they can consult kind of monetary policy rules like a Taylor rule, which would say you're probably where you need to be right now, but you might need to be cutting soon. So maybe they're going off of that.

You could go off of an outlook or a forecast if you think growth is going to slow more, which the fed has had that in its forecast for quite a while. Or you could go off of the data. I mean, in the past, the fed has cut interest rates because it sees something happening either in financial markets or in the economy that doesn't look very good.

And I think what we're all grappling with here is this could be a different situation. The fed has been guiding towards cuts that could happen in a non-growth scare sort of environment. And some people are pointing to 1995 as the analog for that.

But in 1995, you had a negative payroll number before they cut. Now that was revised away. You had, you know, real negative things happening around the world-- Orange County, Mexico peso crisis. So this isn't really analogous yet to 1995 because we don't really see things breaking in the financial system or the economy that would justify cuts.

- Nick, I have another question for you. As you kind of watch Powell here, he's on Capitol Hill. He's feeling these questions from lawmakers. I'm just curious, Nick, just as a long time fed watcher, how do you also sort of judge his skills and talents as a Washington power broker, as somebody has to work the halls of power? How do you-- how do you kind of compare and contrast his strengths there with, say, his predecessor?

NICK TIMIRAOS: Well, he's, obviously-- this is one of the parts of the job that he's better at. He's been very active in meeting with lawmakers and in doing it in sort of a non-show off, you know, I'm not going to try to tell you what an expert I am, I'm going to listen to you sort of way.

And you can see the years that he's invested in that. It pays off when he goes up on the Hill. I mean, this week's testimony probably wasn't the best example of that because the economy is in a better place than it was a year ago.

But what struck me when inflation was quite high-- and you could have really expected lawmakers to go after the fed saying, were you guys asleep at the switch? And they didn't do that. They went easy on him. And I think that's because they generally like him. There are some exceptions.

But he's-- you know, he's done that part of the job listening to lawmakers, making them feel like their concerns are being heard. He's done that part of the job well. It's one of the areas where I think he's probably gotten an A grade from lawmakers in most of the years that he's been fed chair.

- I don't know if this is one of the exceptions to that, Nick. But Senator Elizabeth Warren today called him weak kneed on the subject of bank regulation because he indicated in sort of a surprise, as I alluded to, that maybe the central bank is willing to be a little bit more flexible on the proposals to increase bank capital requirements. And there really hadn't been a lot of indication necessarily that that flexibility was coming, were there?

NICK TIMIRAOS: Well, he has said in the past-- he made a comment at a-- I don't remember which press conference. It was a couple meetings ago, where he said he thought there would be broad support to get the Basel Endgame big bank capital rules proposed or completed. They proposed the draft last summer.

There were two dissents, of course, on the fed board. There were two governors who voted against. And Powell and the Vice Chair of the board, Philip Jefferson had sounded like they also had concerns. They gave their qualified support.

So, you know, it wasn't a complete surprise. But I do-- I was surprised that he said pretty clearly yesterday and again today, there would be broader material changes. He kept the prospect of reproposing the rule on the table. And what we've been hearing is that he's been much more active in internal deliberations around where this is going to land.

And I think that's partly because this has stirred up more political opposition, not just from the banks, but from lawmakers, including Democrats. And, you know, Powell has generally operated from a place where he wants to see broad political support for what the fed does. And if you're going to-- if you're going to do something that doesn't have broad political support, you need to have a really good reason to do it. And so I sort of wonder if that's what is going on here is just that there has been so much opposition to this, not just from the big banks, but from other places that you're seeing some recalibration there.

- Well, that's interesting, Nick, because at the same time, of course, the fed insists it's not political when it comes to interest rate setting policy at least. And you wonder then, you know, especially given the bank-- the sort of mini banking crisis we had last year, what has been happening with New York Community Bank now, is there really not any need to increase those capital requirements?

NICK TIMIRAOS: Well, those capital requirements wouldn't address the problems that New York Community Bank-- I mean, the Basel Endgame is really separate from a lot of, you know, the regional bank stress issues. And it's true. I mean, the fed likes to preserve its independence to set interest rates as it sees fit.

And so sometimes to do that, you will compromise on some of these other issues that are more political. I mean, regulatory policy is more political. And I'm sure the fed would love to be completely independent on that too. But if they're going to have to pick where they try to defend their ability to operate with as free a hand as possible, it's going to be on monetary policy more than on banking policy.