In Washington, the Federal Reserve is set to keep its primary short-term interest rate steady on Wednesday, resisting intense pressure from President Donald Trump, who has urged the central bank to lower borrowing costs.
Trump initially suggested he could remove Fed Chair Jerome Powell after a market downturn, but later clarified he had no plans to do so. Despite this, both Trump and Treasury Secretary Scott Bessent have continued to call for cuts to interest rates, arguing that the current inflation levels do not necessitate high borrowing costs. They point to a significant increase in rates in 2022-2023, a period marked by pandemic-related inflation surges.
In a related matter, Elon Musk, heading Trump’s Department of Government Efficiency, suggested last week that FED budget allocations for its facilities should be revisited.
This scrutiny underscores the ongoing political pressure on the Federal Reserve, even as Trump’s threats to dismiss Powell have subsided. The Fed, however, is poised to maintain its rate at approximately 4.3% during its two-day meeting. Powell, along with other officials, has expressed a desire to assess the impact of Trump’s tariffs on the economy before taking further action.
On Truth Social, Trump declared there is no inflation, falsely suggesting that consumer goods like groceries and gas have become cheaper. In reality, grocery prices have seen increases, while gas prices, although lower than last year’s by nearly 10%, still average around $3.18 per gallon according to AAA. Inflation did show a noticeable decline in March, but it remains above the Federal Reserve’s target.
Economists believe that absent the tariffs, rate reductions might be forthcoming, given that current levels are designed to temper inflation. However, the anticipated price hikes from tariffs prevent the Fed from cutting rates presently.
Vincent Reinhart, Chief Economist at BNY, reflects on the Fed’s cautious stance post-2021 when misconceptions about transient inflation led to a peak in mid-2022. He predicts a cautious and evidence-driven approach from the Fed this time around.
The influence from Trump complicates the situation for Powell, making any immediate rate cuts appear influenced by political pressure, according to Preston Mui of Employ America. He suggests that absent such pressure, the Fed might be quicker to adjust rates based on data.
Powell has previously stated that the tariffs could potentially fuel inflation and hamper economic growth, a precarious situation for the Fed which typically adjusts rates based on inflationary pressures or employment rates. He has hinted that the tariffs’ effects might only create a temporary inflation spike but hasn’t ruled out a persistent impact, warranting a wait-and-see approach before considering rate cuts, suggested by some economists to not occur until at least September.
On the financial front, if tariffs severely impact the economy with job losses and increased unemployment, the Fed might implement rate cuts sooner, with Wall Street predicting such a move around July.
Furthermore, Elon Musk criticized the Fed’s fiscal management concerning a costly Washington D.C. renovation project, emphasizing that this expenditure involved taxpayer funds. Rising costs related to materials and labor, coupled with local building regulations, have reportedly escalated the renovation’s expense.
In a recent address, former Fed Governor Kevin Warsh pointed to the Fed’s heightened scrutiny due to inflation control failures, advocating for a strategic reevaluation to rebuild credibility and possibly hinting at his interest in Powell’s position after his term concludes next year. He criticized the Fed’s engagement in global environmental discussions, deeming it a distraction from its core objectives.
In response, Powell reaffirmed the significance of maintaining Federal Reserve independence, a principle he believes is well-supported by key figures in Washington and Congress.