The Federal Reserve Keeps Interest Rates on Hold
On Wednesday, 30th July and for the fifth straight time, the Federal Reserve’s FOMC (Federal Open Market Committee) kept interest rates steady at 4.25% – 4.50%. The committee voted 9 – 2 to keep interest rates on hold with the two dissenting voices belonging to Governor Christopher Waller and Governor Michelle Bowman. Both governors are appointees of President Donald Trump and experts point out that such dissension from political appointees has not occurred for over 30 years which is a sign of both political pressure and economic uncertainty being felt by the Federal Reserve. Chairman Powell indicated he was not concerned with the dissenting voices but he did say “On the dissents, what you want from everybody and also from a dissenter is a clear explanation of what you are thinking and what arguments you are making”.
Officials from the Federal Reserve downgraded their view of the economy saying “recent indicators suggest that growth of economic activity moderated in the first half of the year” as opposed to previous statements where growth was characterised as expanding at a solid pace. Interestingly, analysts have pointed out that today’s interest rate decisions were made without key data, and the Chairman of the Federal Reserve Powell has pointed out that decisions are currently data driven. This key data is the Commerce Department’s Personal Income and Outlays report, (due out 31st July), which provides essential data on household spending and income, and the Personal Consumption Expenditures price index which is the Federal Reserves favoured inflation gauge.
Following the FOMC meeting, Chairman Powell said the central bank has confidence in the economy of the United States and that it is strong enough to hold interest rates steady as it determines how the tariff policy of President Trump ultimately plays out and their effect on the economy. He went on to say “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”.
Despite political pressure and personal insults from President Trump to Chairman Jerome Powell the Federal Reserve held interest rates steady. Despite many experts predicting a rate cut at the next meeting of the FOMC (16th – 17th September), the financial markets pared back bets expectations for a rate cut, whilst interest rate futures indicated a 50/50 chance of a rate cut in September down from 60%. Data released showed that GDP had increased on an annualised basis by 3% in Q2 after Q1 showed a shrinking of 0.5%, experts put the swing down to companies front-loading of imports to avoid tariffs. Consumer spending advanced at its slowest pace over Q1 and Q2 since the pandemic.
Chairman Powell has made it clear that there is still room to hold rates, something that will no doubt send President Trump into a fit of rage. Data released since the FOMC’s last meeting on 17th – 18th June has given officials little reason to shift from their “wait and see” policy stance, which has been in effect since Donald Trump’s elevation to the White House. Whilst there will be a cornucopia of data between now and the September meeting of the FOMC, experts point out that the Jackson Hole Economic Symposium (in Kansas City) is being held between 21st – 23rd August. The Federal Reserve Bank of Kansas City hosts central bankers, policymakers, academics and economists from around the world, and Chairman Powell has been known to indicate forthcoming policy shifts, so perhaps financial markets and President Trump will get a peek into future Federal Reserve policy.
