Unprecedented, increasingly heavier political pressure from the White House on the central bank to lower interest rates: would that central bank, the Federal Reserve, yield to that?
No, not for the time being, you can conclude after the interest meeting that the Fed held in Washington on Wednesday. The central bank led by Jerome Powell kept the interest unchanged, on a bandwidth between 4.25 and 4.5 percent.
The FED finds the risk that inflation will increase too high for the time being to justify an interest rate reduction. For example, the Central Bank will go against President Donald Trump, who wants to boost the economy through hefty interest rate cuts and make the national debt more affordable. The president made that in recent weeks louder and louder, among other things, by threatening with the resignation of Powell.
At the same time, the FED is becoming increasingly distributed internally. Two of the seven regular board members of the Fed voted against the interest rate decision. These dissidents had wanted an interest rate reduction. The FED board consists of seven permanent directors plus five heads of regional FED departments. Since 1993 it did not happen that two permanent board members officially objected, writes The Wall Street Journal. These are Michelle Bowman and Christopher Waller, who were both appointed by Trump during his first term (2017-2021). According to American media, Waller would like to follow Powell, who was also appointed by Trump. Powell’s term ends in May 2026, if he is not previously pointed out by Trump the door.
‘Dom head’
President Trump demands drastic interest rates from Powell and his administration – of three percentage points, recently suggested – among other things because this would help the economy and make the national debt more affordable. Trump has raised his attacks on Powell in recent weeks. Among other things, he called Powell a “terribly bad” FED chairman, “too late” (with interest rates) and a “stupid head.”
As a possible ground for Powell, the White House suggests that he is responsible for cost unreescours in the renovation of the FED headquarters in Washington. Last week Trump came by unsolicited in the FED building and tried to intimidate Powell in front of the cameras.
After this very uncomfortable episode for Powell, which he called a “pleasant visit” in the press conference, he was in his more trusted role on Wednesday in the Fed press room. As if nothing had happened, he gave the economic arguments dry for the right of the interest.
In recent weeks, Trump raised his attacks on Powell and called him a “terribly bad” FED chairman
The FED has a double mandate: price stability (defined as inflation of around 2 percent) and maximum employment. Currently, inflation is between 2.5 and 2.7 percent – “somewhat” above the objective, in Powell’s words. Unemployment is low, at 4.1 percent, the labor market is “robust,” he said.
Inflation starts to rise further, especially due to more expensive imports, including toys, clothing and interior items. Retail chains such as Walmart already announced in May that they would increase their prices as a result of the import duties. Inflation in the US will remain “above the target level,” the International Monetary Fund wrote on Tuesday in an economic analysis.
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Powell said that the question will be in the coming period whether the extra inflation through the input duties will turn out to be ‘short -lived’, or ‘stubborn’. “We must assess and manage that risk,” he said. Still fresh in the memory, the Fed has its wrong estimate of inflation just after the Coronapandemie. The Fed underestimated, just like other central banks, the duration and height of inflation.
“Not our case”
Powell said, in other words: at the moment, because of Trumps’s own trade policy, we cannot lower interest rates. He opened whether this is possible at the next interest meeting in September: In the meantime, the Fed will receive a lot of new economic data, also about economic growth, which is now taking.
And Trumps argument that the US government can borrow cheaper if Powell lowers interest? The FED boss was very clear about that: that is not our business. “We have a mandate and we do not take into account the costs for the government of changes in interest.”
Powell painted the division within the FED board as a healthy substantive discussion about the state of inflation and the labor market. “This was a good meeting.”
This interest rate decision is very against the sore leg is from President Trump and threatens to make the campaign from the White House against Powell more intense. Trumps are increasingly involved in the FED concern about attacking the independence of the US central bank. According to most economists and investors, this independence is an important pillar under financial stability.
The chairman of the board of major American investigative banks such as JP Morgan and Goldman Sachs warned in recent weeks against unrest in the financial markets in further political interference. Powell stated on Wednesday that the independent position “has been good for the American population” and therefore “respected”.
It’s not for nothing, Powell said, “a little distance” has been created between politics and monetary policy in all developed economies. “Otherwise there is the temptation to use the interest rate for, for example, influencing the elections.” This is “well understood in the American congress” and is “very important,” Powell said – without calling his tormentus Trump.