Federal Reserve holds US interest rates despite Trump pressure

The National

3 days ago

A divided Federal Reserve held US interest rates steady on Wednesday, even as President Donald Trump intensified his pressure campaign on the central bank to lower borrowing costs.
The Fed's target range remained set at 4.25 to 4.50 per cent following the central bank's decision to extend its rate-cut pause for a fifth consecutive month. The UAE Central Bank, which follows Fed decisions because of the dollar peg, also maintained its base rate at 4.4 per cent following the US central bank's announcement.
"Although swings in net exports continue to affect the data, recent indicators suggest that growth of economic activity moderated in the first half of the year," the Fed said in a statement.
Fed governors Christopher Waller and Michelle Bowman dissented, preferring to lower the target range by 25 basis points. It was the first time in more than two decades that two Fed governors dissented on a policy decision.
Fed officials have adopted a 'wait-and-see' approach in policy decisions this year after cutting rates by 100 basis points in 2024. Mr Trump's trade, fiscal and immigration agendas have raised expectations among most economists that a trend in moderating inflation could change course, and that economic growth and the jobs market could weaken if the administration follows through with its policies.
Earlier on Wednesday, Mr Trump seized on a better-than-expected GDP report to demand lower interest rates.
'2Q GDP JUST OUT: 3%, WAY BETTER THAN EXPECTED! 'Too Late' MUST NOW LOWER THE RATE. No Inflation! Let people buy, and refinance, their homes!' he wrote on the Truth Social media platform.
Trump pressure
The President claims that reducing the federal funds rate to 1 per cent would save the US $1 trillion on interest costs to help service the national debt – a concept known as fiscal dominance. However, data from the Federal Reserve Bank of St Louis showed the US spent $1.1 trillion in interest on its debt last year.
So far, Mr Trump's unrelenting demands to lower rates have had no effect on Federal Reserve chairman Jerome Powell or his colleagues. And even Fed members who have called for rate cuts have suggested doing so at a far more moderate pace than what Mr Trump wants. Mr Trump's attacks have tested the independence of the Fed, which is a quasi-private institution that presidents typically do not interfere with.
Tension between Mr Trump and Mr Powell spilt out in public last week when the two bickered over the Fed's renovation costs at its headquarters in Washington. Some observers believe that Mr Trump is using the project's cost overruns as a pretext to fire the Mr Powell, although the President said he does not believe firing Mr Powell is necessary.
Mr Powell and his 11 colleagues on the rate-setting Federal Open Market Committee (FOMC) entered this week divided on interest rates.
Two members had publicly backed cutting rates now in the weeks leading up to the July meeting, while others expressed a desire to wait for greater clarity on tariffs' impact on the economy. A separate camp argued that rates should remain steady until there is clear weakening in the labour market.
While Mr Trump has demanded rate cuts, his tariff agenda is likely to have had the opposite effect. Fed officials have repeatedly said they want greater clarity on the new tariffs' effects on the economy before moving to cut rates again. Mr Powell has also said the Fed would have cut rates by now were it not for the uncertainty caused by the tariffs.
The effective US tariff rate today is 18.2 per cent, the highest since 1934, according to The Budget Lab at Yale.
Economists argue businesses will eventually pass those costs on to consumers, and the Fed has suggested such prices could be seen this summer.
Mr Powell has previously warned higher costs could come this summer. And he has exercised extreme caution towards cutting interest rates in the face of Mr Trump's tariffs after nearly returning inflation back to its 2 per cent goal following a post-pandemic price surge. The Personal Consumption Expenditures (PCE) Price Index rose to as high as 7 per cent in June 2022 before moderating to its current 2.3 per cent rate – although still above the Fed's long-term goal.
Fed divisions
Debates within the Fed were expected to centre on which side of the central bank's dual mandate would require immediate attention. Unlike other central banks, the Fed is tasked with promoting price stability and maximum unemployment.
Heading into this week's two-day meeting, though, policymakers were still more concerned about the inflationary impact of tariffs and whether businesses would handle or pass the costs associated with the new tariffs.
Mr Waller has been among the minority of Fed officials in favour of cutting rates this month, arguing that they need to move soon before the labour market further weakens. Recent data showed that the labour market as being in a state of stasis with both hiring and quit rates near historic lows, even as the unemployment rate remains stable at 4.1 per cent.
Separate data showed that tariffs are beginning to appear in some aspects of the economy. Inflation data released this month showed the prices of everyday products like toys and household appliances increased last month in a sign that costs are beginning to be passed on to consumers.
A report from the Commerce Department earlier on Wednesday showed the US GDP also bounced back in the second quarter after businesses had stocked up on imports – which are subtracted from the measure of economic activity – in the first quarter. And while consumer spending rose from 0.5 per cent to 1.4 per cent, business and residential investment dipped.
Final sales to private domestic purchasers, meanwhile, slowed from 1.9 per cent in the first quarter to 1.2 per cent in the second quarter.
Fed officials were expected to receive more information this week including inflation and unemployment data from June on Thursday and Friday, respectively.