Introduction to the US Federal Reserve’s Interest Rate Decision
The US central bank is expected to hold off on slashing interest rates again at its upcoming meeting. This decision comes as officials gather under the cloud of an intensifying pressure campaign by US President Donald Trump. The Federal Reserve has kept the benchmark lending rate steady since the start of the year as they monitor how Mr Trump’s sweeping tariffs are impacting the world’s biggest economy.
The Impact of Tariffs on the US Economy
With Mr Trump’s on-again, off-again tariff approach, and the levies’ lagged effects on inflation, Fed officials want to see economic data from this summer to gauge how prices are being affected. The central bank seeks a balance between reining in inflation and the health of the jobs market when mulling over changes to interest rates. The Fed’s data-dependent approach has enraged the Republican president, who has repeatedly criticized Fed chairman Jerome Powell for not slashing rates further.
Pressure from President Trump
Mr Trump has called Mr Powell a "numbskull" and "moron" and has signaled he could use the Fed’s $2.5 billion renovation project as an avenue to oust Mr Powell. However, he later backed off, saying that would be unlikely. Mr Trump visited the Fed construction site, making a tense appearance with Mr Powell, in which the Fed chair disputed Mr Trump’s characterization of the total cost of the refurbishment in front of the cameras.
Expectations from Economists
Economists expect the Fed to look past the political pressure at its policy meeting. "We’re just now beginning to see the evidence of tariffs’ impact on inflation," said Ryan Sweet, chief US economist at Oxford Economics. "We’re going to see it in July and August, and we think that’s going to give the Fed reason to remain on the sidelines." Since returning to the presidency, Mr Trump has imposed a 10% tariff on goods from almost all countries, as well as steeper rates on steel, aluminum, and autos.
The Effect of Tariffs on Inflation
The effect on inflation has so far been limited, prompting the US leader to use this as grounds for calling for interest rates to be lowered by 3 percentage points. Currently, the benchmark lending rate stands at a range between 4.25% and 4.5%. Mr Trump argues that lower rates would save the government money on interest payments and has floated the idea of firing Mr Powell. The comments roiled financial markets.
The Fed’s Independence
Analysts expect to see a couple of members break ranks if the Fed’s rate-setting committee decides for a fifth straight meeting to keep interest rates unchanged. However, this does not necessarily mean that Mr Powell is losing control of the board. "It’s not out-of-line or unusual to see, at times when there’s a high degree of uncertainty, or maybe a turning point in policy, that you get one or two people dissenting," said Nationwide chief economist Kathy Bostjancic.
The Labour Market
The big wild card is the labour market. There has been weakness in the private sector, while the hiring rate has been below average, and the number of permanent job losers is rising. "There are some fissures in the labour market, but they haven’t turned into fault lines yet," Mr Sweet said. If the labour market suddenly weakened, he said he would expect the Fed to start cutting interest rates sooner.
Conclusion
In conclusion, the US Federal Reserve is expected to hold off on slashing interest rates again at its upcoming meeting, despite pressure from President Trump. The central bank will look past the political pressure and focus on economic data, including the impact of tariffs on inflation and the health of the jobs market. While there are some concerns about the labour market, the Fed is expected to remain on the sidelines for now, waiting for more data before making any changes to interest rates.
