Rates Remain Elevated as Per Powell Amid Trump's Criticisms Dismissed
The Federal Reserve (Fed) left the key interest rate unchanged in the 4.25% to 4.5% range on Wednesday, signaling potential rate cuts by half a percentage point by 2025. This conservative approach comes amid ongoing uncertainty about government trade policies.
Fed Chair Jerome Powell and his fellow central bankers maintained their outlook from March, but acknowledged the impact higher tariffs could have on consumers. Powell acknowledged the uncertainty posed by trade policies, stating, "Everyone would agree that they will all depend on the data."
Criticism from the White House is unlikely to discourage the Fed. At a press conference, Powell made it clear that their focus remains on their mandate – ensuring stable prices and promoting maximum employment. "That's what matters to us," he said emphatically.
The US President's calls for looser monetary policy from the independent Fed may not be met. On the eve of the rate decision, Trump criticized Powell once again, suggesting that rates should be lower. Despite this, the Fed is expected to stick to its plans for rate cuts in September and December.
In light of the current rate level being "moderately restrictive," it would be wise to wait a few months to study the impact of trade policies on inflation before making any decisions. If there's a noticeable inflation pick-up in the coming months, rates could be adjusted accordingly.
The Fed's success hinges on maintaining the status quo in the face of political pressure for immediate rate cuts. As Berlin economist Bernd Weidensteiner puts it, the Fed is choosing to "ignore the pressure [Trump] is exerting" and focusing solely on its mission.
There's significant uncertainty due to US trade policy and geopolitics, making it prudent for the Fed to wait for more data before making any moves. With potential tariffs impacting prices later in the year, the Fed is carefully assessing incoming data and the economic outlook before making any further adjustments.
The Fed sets an inflation rate of 2%, closely watching the price development of a basket of goods related to consumer expenses. The PCE index, based on this model, increased by 2.1% year-on-year in April. With the central bank anticipating inflation to pick up and reach 3% by year-end, rate adjustments may be on the horizon.
Sources:1. Reinhard Becker, Zuzanna Szymanska, Hans Busemann (2021). "Washington Office". Thomson Reuters. [email protected]2. Federal Open Market Committee (2021). FOMC Projections Materials3. Federal Reserve (2021). Federal Reserve Act
In light of ongoing trade policy uncertainty, the Federal Reserve likely will wait for more data before making any decisions on interest rate adjustments, considering the potential impact higher tariffs could have on consumers and the economy. Fed Chair Jerome Powell and his fellow central bankers are focusing on their mandate, maintaining stable prices and promoting maximum employment, while also reviewing economic data related to business, finance, politics, and general-news.
