Federal Reserve Stands Firm on Interest Rates Amid Economic Uncertainty

WASHINGTON (AP) — In a recent address, Federal Reserve Chair Jerome Powell made it clear that he is not likely to yield to President Donald Trump’s repeated calls for lower interest rates. Despite pressure, the Fed has opted to keep its key short-term interest rate stable for the fifth consecutive time this year, maintaining it at approximately 4.3%. This decision was widely anticipated, yet Powell indicated that it might take several months to accurately gauge the impact of the president’s extensive tariffs on inflation.

Inflation Concerns and Rate Adjustments

Powell noted, “We’ve learned that the process will probably be slower than expected,” emphasizing that it is essential to fully understand how tariffs may affect inflation moving forward. His remarks suggest that the previously anticipated rate cut in September has now become less likely.

There have been visible signs of division within the Fed’s governing board, with Governors Christopher Waller and Michelle Bowman advocating for a decrease in borrowing costs. In contrast, the remaining nine officials, including Powell, preferred to maintain the current rate. This marks the first occurrence in over 30 years where two of the seven Washington-based governors have dissented. Governor Adriana Kugler was absent and did not participate in the vote.

Implications for Market and Future Meetings

The Fed’s choice to maintain the current interest rate sets the stage for potential tensions between the central bank and the White House. Trump has consistently pushed for reduced borrowing costs as part of a broader strategy to exert control over one of the few remaining independent federal institutions.

During the news conference following the decision, Powell refrained from hinting at a possible rate change in September. The probability of a rate cut for that month, as evaluated by futures pricing, dropped significantly from nearly 60% before the meeting to just 45% after the press conference, indicating heightened uncertainty.

Market Reaction

In response to Powell’s remarks, major U.S. stock indexes, which were initially trending positively, swiftly turned negative. Market analyst Lauren Goodwin from New York Life Investments remarked, “The markets seem to think that Powell pushed back on a September rate cut.”

Powell reiterated the consensus among committee members: inflation remains above the Fed’s 2% target, while the job market continues to exhibit resilience. Upcoming data from the government is expected to show that core inflation, excluding volatile energy and food prices, rose by 2.7% year-over-year.

Expectations and Future Projections

Gus Faucher, chief economist at PNC Financial Services, posits that while tariffs may temporarily affect inflation, the true impact will likely take the remainder of the year to manifest. He does not foresee any rate cuts occurring until December.

On the contrary, Trump argues that as the U.S. economy appears to be thriving, interest rates should be decreased. However, the Fed must adjust rates to either stimulate or temper growth, often favoring higher rates during periods of economic strength to ward off inflation.

Economic Growth Insights

Recent data reveals that the economy expanded at a robust annual rate of 3% in the second quarter, following a contraction of 0.5% in the first quarter. However, when averaged, this results in a modest growth rate of around 1.2% for the first half of the year.

The dissensions expressed by Waller and Bowman may suggest underlying motivations related to potential succession plans for Powell, whose term extends until May 2026. Waller, in particular, has been mentioned as a possible future candidate for the Fed chair position.

Michael Feroli, an economist at JPMorgan Chase, commented that if Waller and Bowman dissent, “it would say more about auditioning for the Fed chair appointment than about economic conditions.”

Looking Forward

With three more Fed policy meetings scheduled for this year—September, October, and December—the likelihood of rate cuts remains uncertain. When the Fed does lower interest rates, it typically leads to reduced borrowing costs for various loans, including mortgages and credit cards.

Nevertheless, economists have voiced concerns regarding job growth, particularly as the economy added only 74,000 jobs in June, largely in the health sector. Tom Porcelli, chief economist at PGIM Fixed Income, stated, “We are in a much slower job hiring backdrop than most people appreciate.”