On a brisk winter morning in late February 2025, the iconic dome of the Capitol stood glistening under the warm sun as Jerome Powell, the Chairman of the Federal Reserve, stepped into the committee room of the House Financial ServicesWith a seating capacity of two hundred and every chair occupied, the atmosphere in the hearing room was charged with anticipationThe cameras were rolling, capturing every moment as global financial markets hung on the words of the central bank leaderJust the day prior, the Bureau of Labor Statistics had released shocking data showing a year-on-year rise of 3.8% in the Consumer Price Index (CPI) for January, igniting significant turbulence in financial markets.

As the digital clock buzzed to signal ten o'clock, Powell cleared his throat and began to read his prepared testimonyHis voice, deep and steady, echoed in the room: "Members of the committee, the U.S. economy is at a crucial turning pointWe acknowledge the pronounced fluctuations in the January CPI data, but it is imperative to emphasize that the Federal Reserve's policy decisions are made based on a comprehensive assessment of the overall economic landscape rather than isolated data points." His assertion rippled through the trading floors like a stone tossed into a calm lake, causing immediate fluctuations in the price of federal funds futures on the CME, altering the probability of a rate cut in March from 70% to 65%.

Powell’s comments reiterated the Federal Reserve’s longstanding principle of "data dependence." Since the peak of inflation in 2023 and the subsequent reduction of interest rates by a total of 75 basis points, January’s unexpected CPI spike had thrown market expectations into turmoil

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In his remarks, Powell cited a famous quote from former chairman Alan Greenspan: "The art of economic forecasting lies in distinguishing between signals and noise." He indicated that 0.6% of the monthly increase in CPI was attributed to volatility in energy prices, with another 0.2 percentage points stemming from an unusual rise in used car pricesThese structural factors made it difficult for single-month data to reflect long-term inflation trends.

However, concerns in the market were not unfoundedSince the U.S. implemented a policy of countervailing tariffs in 2024, the import price index had cumulatively risen by 4.2%, placing upward pressure on prices downstreamDuring the hearing, Democratic congresswoman Nancy Pelosi from California pointedly asked, "If inflation resulting from tariffs continues, is the Federal Reserve prepared to adjust its policy path?" Powell's response was cautious yet resolute: "We are closely monitoring the impact of tariffs on prices, but as of now, we have not seen them emerge as a primary driver of persistent inflation."

Throughout his testimony, Powell made frequent reference to the Personal Consumption Expenditures (PCE) price index, which is pivotal in understanding the Fed's policy logicThe PCE index differs significantly from the CPI; it encompasses a wider range of prices, including those for services such as healthcare and education, and uses a chained-weighting method which better reflects changes in consumer behaviorData showed that core PCE had risen by 2.3% year-on-year in 2024, notably lower than the 3.1% increase seen in CPI during the same periodPowell showcased a comparative chart during the hearing, emphasizing, "When CPI and PCE diverge, we tend to lean towards the guidance provided by the PCE."

This preference for data sparked intense discussion in financial circles

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Jan Hatzius, chief economist at Goldman Sachs, pointed out, "The Federal Reserve's policy framework is undergoing a paradigm shiftThey have become overly reliant on CPI over the last decade, leading to missed opportunities for rate hikes in 2021. The shift toward focusing on PCE indicates a deeper understanding of the transmission mechanism of monetary policy." This transformation is directly influencing market expectations, with a Bloomberg survey revealing that 85% of institutional investors believe that PCE data will be a core variable driving market volatility in the next three months.

Powell’s testimony not only influences monetary policy expectations but also reveals the Federal Reserve’s profound contemplation of structural changes within the economyIn response to inquiries about the impact of artificial intelligence (AI) on inflation, he remarked, "The proliferation of AI technologies may temporarily bolster capital expenditures, but in the long run, it will enhance productivity and alleviate pricing pressures." This forward-looking perspective resonates with views expressed by Silicon Valley tech giantsOn the same day, Satya Nadella, CEO of Microsoft, announced during a quarterly earnings call that the company would invest $10 billion in AI-driven supply chain optimization, which is expected to reduce operational costs by 15%.

As the hearing concluded, Powell stepped out of Capitol Hill, where the cherry blossoms had not yet bloomed, but the promise of spring was subtly rising within financial marketsThe S&P 500 managed to recover some ground before the close, while the Nasdaq Composite Index saw its losses narrow to 1.2%. This market reaction reflected investors' recalibration to the Federal Reserve’s "data-dependent" policy—traders at Goldman noted in their report, "Powell’s testimony neither extinguished expectations for rate cuts nor ignited panic over rate hikes, indicating the market is adapting to a more resilient framework of monetary policy."

Global central banks were also focused on Washington

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