Ignoring Trump’s demands, Federal Reserve stands pat on interest rates
KEY POINTS
- At its July meeting, the Federal Reserve voted to keep benchmark interest rate unchanged
- A 9-2 vote by policy-setting Open Market Committee was first to include two dissents in decades
- Fed Chairman Jerome Powell said sticky U.S. inflation was driver behind decision to stand pat
The Federal Reserve’s policy-setting Open Market Committee voted 9-2 Wednesday to leave its benchmark interest rate unchanged despite a steady torrent of criticism from President Donald Trump, who has argued the Fed is overdue in making a rate reduction.
While the U.S. central bank approved a series of three straight cuts to close out 2024, the monetary body’s overnight lending rate has remained in the 4.25% to 4.5% range since December.
A statement released Wednesday by the Fed immediately following its two-day meeting read much the same as the one issued after its June policy gathering.
“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 statement reads. “The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated.”
Fed Governors Michelle Bowman and Christopher Waller, both nominated by Trump during his first term in office, have advocated for the Fed to begin easing interest, believing inflation is under control. Both voted against holding the current rate, marking the first time since 1993 that multiple governors dissented on a Fed rate decision, according to CNBC.
“It is an exceedingly rare occurrence when two Fed governors dissent at an FOMC meeting, but it was the most well-telegraphed dissension ever at today’s FOMC meeting,” Jack McIntyre, portfolio manager at Brandywine Global, told CNBC. “The driver of the dissension was about the timing of rate cuts, not the direction of policy adjustments. Not a big deal. The real impact of the dissenters was to pull (Fed Chairman Jerome) Powell toward the dovish camp for September.”
What Powell had to say about rate decision
During a press conference Wednesday, Powell underscored the monetary body’s congressional dual mandate of maintaining price stability and maximum employment. Powell told reporters that while the U.S. job sector was in solid shape, inflation that continues to run well north of the Fed’s 2% target justifies, for now, maintaining the current federal funds rate.
Powell also noted that trade policy changes were beginning to show impacts on the U.S. economy, but said the complete scope of tariff effects may not be seen for some months.
“Changes to government policies continue to evolve and their effects on the economy remain uncertain,” Powell said. “Higher tariffs have begun to show through more clearly to prices of some goods but their overall effects on economic activity and inflation remain to be seen.
“A reasonable base case is that the effects on inflation could be short-lived, reflecting a one-time shift in the price level. But it is also possible that the inflationary effects could, instead, be more persistent and that is a risk to be assessed and managed.”
The most recent federal data shows prices on goods and services increased at a 2.7% annual rate in June, ratcheting up from May’s 2.4% and an increase that most economists believe reflects the first signs of new trade tariffs impacting U.S. consumer spending.
What’s been going on with inflation?
The June Consumer Price Index report from the Labor Department shows prices moved up 0.3% on a monthly basis in June as overall inflation, which has been mostly moving down since a January reading of 3.0%, hit its highest level since February.
Core inflation, a measure that strips out volatile food and energy prices, hit an annual rate of 2.9% in June, up 0.2% from May.
Annual CPI inflation for the Mountain West states, which include Utah, was running well below the national rate last month at 1.9% but was up 0.2% from May.
June saw national price increases on a wide range of categories including gasoline, up 1% from May, grocery prices that increased 0.3% on a monthly basis and are now 3% higher than a year ago and housing-related costs that increased 0.2% over last month and are 3.8% higher over the past 12 months.
Tariff-sensitive goods also saw increases including appliances, toys, electronics, apparel and sporting goods.
“You are starting to see scattered bits of the tariff inflation regime filter in,” Eric Winograd, chief economist at asset management firm AllianceBernstein, told the Associated Press after release of the June report. Winograd added that the cost of long-lasting goods rose last month, compared with a year ago, for the first time in about three years.
Trump’s beef with Powell
Trump has leveled consistent criticism at the Fed and more specifically at Powell, including threats to fire or remove the chairman, for not moving fast enough to lower interest rates, which the president has argued are three points higher than they should be.
Ironically, perhaps, Trump provided the gateway to Powell’s leadership position at the Fed, thanks to a 2017 presidential appointment that flew through the Senate Banking Committee and was confirmed by the full Senate in early 2018.
Powell, a Republican and former private equity executive, joined the Federal Reserve in 2012 and ascended to the chairmanship in 2018 via Trump’s appointment. President Joe Biden renewed Powell’s term in 2022, which runs through May 2026.