US Fed set to hold firm against Trump pressure

News.com.au

30-07-2025

The Federal Reserve is expected to defy aggressive pressure from President Donald Trump and keep interest rates unchanged Wednesday, though divisions about the best response to tariff risks may bubble to the surface.
The US central bank's decision, due to be announced at 2:00 pm US eastern time (1800 GMT), comes amid a flurry of data releases this week, including an early estimate showing the world's biggest economy returned to growth in the second quarter.
The Fed is also set to take into account an incoming raft of new tariff rates Trump has said he would impose on Friday.
A spokesperson for the central bank said Wednesday that its policy meeting began at 9:00 am as scheduled.
"It's a high-wire act for the Fed, because they're balancing a lot of risks without a net," KPMG chief economist Diane Swonk told AFP.
"Some of the most tariff-sensitive sectors have begun to show price increases, but the bulk of any inflation bump due to tariffs is still ahead of us," Swonk added in a recent note.
Meanwhile, there are cracks in the foundation when it comes to the labor market, she said, adding that "it doesn't take much of a pick-up in layoffs to have a bigger effect on demand."
Analysts broadly expect the Fed to hold interest rates steady at a range between 4.25 percent and 4.50 percent. Its last reduction was in December.
The outcome would vex Trump, who has lashed out repeatedly at independent Fed Chair Jerome Powell for not lowering rates sooner -- calling him "too late," a "numbskull" and "moron."
Trump, citing Wednesday's better than expected GDP growth figure, said Powell "must now lower the rate."
The repeated attacks have fueled speculation that Trump may attempt to fire Powell or otherwise pressure him to resign early.
Powell will likely sidestep such questions at a press conference Wednesday, said JP Morgan chief US economist Michael Feroli in a note.
Powell's term as Fed Chair ends in May 2026.
- 'Hyper-politicized' -
Analysts are also watching for potential internal disagreements over the rate decision.
Economists anticipate potentially two dissents among Fed policymakers -- Fed Governors Christopher Waller and Michelle Bowman -- as they had previously signalled willingness to reduce rates as soon as in July.
"Dissents by two governors are rare and haven't occurred since 1993," said Nancy Vanden Houten, lead US economist at Oxford Economics.
Waller flagged this month that indicators do not point to a particularly healthy private sector jobs market.
While he did not commit to a decision, he has made the case for a July rate cut and stressed that policymakers need to respond to real-time data.
Analysts said financial markets would already have braced for two dissents given officials' recent remarks.
But Swonk warned: "What I worry about is how, in this hyper-politicized environment, that's perceived."
"Multiple dissents by governors, who are closest to the Chair, could signal an unintended view that they have lost confidence in the chairman," Swonk noted.
Trump has called for interest rates to be dropped by as much as three percentage points.
- Cruel summer -
"It's going to get tougher over the summer," Swonk said.
"Tariff-induced price pressures are starting to filter through the economy," said EY chief economist Gregory Daco in a note.
Companies are citing weaker earnings and higher input costs, while elevated consumer prices are beginning to weigh on retail sales.
"More demand erosion is likely in the months ahead," Daco said.
He expects Powell to "strike a tone of cautious patience" in his press conference after the rate decision.
Powell would likely reiterate that policy remains data-dependent, and that the Fed can adjust this as conditions evolve, Daco added.
Looking ahead, Swonk said, "the real issue will be, what does he say at Jackson Hole now?"
Powell typically addresses an annual central banking conference in Jackson Hole, Wyoming, and it takes place this year in late August.
"The next shoe to drop is: Will there be enough data by the time we get to Jackson Hole to open the door to a September rate cut?" Swonk said.