WashingtonJerome Powell, the chair of the Federal Reserve, has now hinted that the central bank may soon lower its key interest rate. However, he must figure out how to do so without appearing to give in to pressure from the White House.
Powell has mostly disregarded President Donald Trump’s persistent demands that he lower borrowing costs for months. Powell, however, indicated in a much-awaited speech on Friday that the Fed might do so as early as its September meeting.
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The Fed will have to make a difficult choice since it has to balance it against persistent inflation and the possibility of an improving economy in the second half of this year. If either of these trends materializes, a cut may appear premature.
Trump has pushed Powell to decrease interest rates, claiming that there is no inflation and that doing so would result in lower interest payments for the government’s $37 trillion debt.
Powell, meanwhile, has indicated that a rate decrease is probably coming for reasons that are very different from Trump’s: He is concerned about the economy’s decline. He also hinted that the Fed will go cautiously and drop rates far more slowly than Trump desires during his speech on Friday at an economic symposium in Wyoming’s Grand Teton National Park.
Powell noted that economic growth has significantly slowed in the first half of this year, falling from 2.5% to 1.2% annually. He noted that there has also been a noticeable slowdown in the demand for labor, which could lead to an increase in unemployment.
Powell added, however, that tariffs have begun to raise the cost of products and may raise inflation further. Fed officials will keep a careful eye on this potential and will be wary of further rate decreases.
At 4.3%, the Fed’s benchmark short-term interest rate affects other borrowing prices for mortgages and auto loans, among other things. No Fed official agrees with Trump’s demand that it be lowered as low as 1%.
The Fed will probably continue to uphold its long-standing independence as it moves forward. Since it may take actions like raising interest rates to cool the economy and fight inflation that are more difficult for elected politicians to accomplish, most economists believe that an apolitically independent central bank is essential to controlling inflation.
Twelve of the Fed’s 19 members who make up the interest-rate-setting committee cast votes on rate decisions. In an interview with The Associated Press on Friday, Beth Hammack, head of the Federal Reserve’s Cleveland branch, stated her commitment to the Fed’s independence.
“I try to tune out all the other noise, and I’m laser focused… on making sure I can deliver good outcomes for the public,” she said.
Like many of her colleagues, she is still worried that the Fed must continue to combat stubborn inflation.
According to Hammack, inflation is excessively high and has been moving in the wrong direction. In terms of inflation, I believe we are currently slipping away from our objectives.
During his speech in Wyoming, when he was given a standing ovation by the gathered academics, economists, and central bank officials from all around the world, Powell himself did not address the Fed’s independence. Ironically, though, Adam Posen, president of the Peterson Institute for International Economics, said that was probably a conscious decision meant to show the Fed’s independence.
According to Posen, they were doing their utmost to convey that they were moving on with the business by not discussing independence. “We are currently engaged in a polite internal debate over the issue’s merits. And we will make the right decision, even if it pleases the president.
In light of this, Trump stepped up his own pressure campaign on a senior Fed official.
In the event that Fed Governor Lisa Cook does not resign, Trump threatened to fire her. Cook allegedly committed mortgage fraud when she purchased two houses in 2021, according to Bill Pulte, a Trump appointee who heads the agency that oversees the mortgage behemoths Fannie Mae and Freddie Mac. No charges have been brought against her.
Cook has stated that she will not be coerced into resigning. Regarding Trump’s warning, she declined to react on Friday.
Trump would have the chance to appoint a supporter to the Fed’s governing board if Cook were to be removed in some way. Every decision regarding interest rates is subject to a vote by board members. He has previously proposed Stephen Miran, a leading White House economist, to succeed former governor Adriana Kugler, who resigned on August 1.
Powell has not been fired, despite Trump’s prior threats to do so. Powell was selected by Trump in late 2017. In roughly nine months, his term as chair will come to a conclusion.
Trump has attacked Powell before. Powell was not deterred by the president’s 2018 attack on him for raising interest rates, according to Michael Strain, director of economic policy studies at the American Enterprise Institute.
According to Strain, the president has a lengthy history of exerting pressure on Chairman Powell. Powell, the chairman, has a history of bucking that pressure. Therefore, I believe it would be strange if he gave in for the first time on his way out the door.
However, Strain believes Powell is overestimating the likelihood that the economy would continue to deteriorate and increase unemployment. The Fed may be forced to change course and raise rates once more the following year if inflation worsens while hiring is still ongoing.
According to him, that would further harm the Fed’s reputation for preserving modest and steady price inflation.
