The Federal Reserve has so far resisted President Donald Trump’s aggressive pressure campaign to throw inflation concerns out and attempt to boost the U.S. economy with lower interest rates.
That’s expected to continue Wednesday, as the central bank is expected to leave interest rates unchanged. If so, that’s likely to annoy Trump, who is already reshaping the global economy with his tariffs.
The Fed’s rate setting committee began its two-day meeting Tuesday. Market projections and analysts expect it won’t cut its key rate.
“We expect Chair Powell to reiterate his view that the Fed can afford to remain on hold to assess the tariff impact as long as the U.S. economy and labor market remain strong,” analysts with financial group Nomura said in a note published Friday. “Data released lately have pointed to nascent signs of tariff-induced price pressures. Additionally, growth data have remained robust.”
The central bank, which is tasked with using its influential interest rates to balance inflation and unemployment, is weighing whether the time is right to loosen the flow of cash into the economy at the risk of rising prices.
Most data indicates the economy is in solid shape. At 4.1%, the unemployment rate is relatively low — though the median time it takes an unemployed person to find a job has surged to more than 10 weeks. Stocks are at all-time highs, in large part thanks to bets on the potential for artificial intelligence to transform companies’ bottom lines.
The biggest wild card is inflation. For the first five months of Trump’s second term, inflation readings were relatively subdued. But in June, the economy began to show the first signs of increased price pressures as a result of the tariffs, with price growth for goods such as apparel, appliances and toys accelerating. Economic forecasters and business surveys suggest tariffs are likely to continue to feed into higher consumer prices.
That has complicated the picture for the Fed. An ironic twist: Jerome Powell has said the Fed might have cut already were it not for Trump initiating his sprawling and volatile tariff policy as inflation continued to cool.
Trump has been especially hard on Powell, raising fears in Washington and Wall Street that he may try to fire the Fed chair. For now, Trump has seemingly backed off the idea, though some experts say it is unclear whether he has the legal authority to do so anyway.
Still, Trump and administration officials have continued to put the squeeze on Powell and the Fed — raising concerns about the central bank’s long-standing independence and immunity to political interference. Trump has said cutting rates would boost the economy by making it cheaper to borrow money and also reduce the amount that the U.S. government has to pay on its debts.
Powell has showed no signs he would budge to political pressure.
Who decides when to cut?
The Fed’s key rate is set by a group called the Federal Open Market Committee. Powell is head of the panel, but it includes 11 other members — two of whom, like Powell, were appointed by Trump during his first term. Those two, Michelle Bowman and Christopher Waller, have openly called for lowering rates. They argue that the pace of price growth has been largely contained, that any bump in costs from tariffs will be short lived and that there are signs of accelerated weakening in the job market.
The committee meets eight times a year to discuss monetary policy, including whether to raise, lower or hold rates steady. The Fed chair serves as the public face of that committee and leads those meetings, so the central bank’s head can have some influence over the debate and direction of the discussion.
It only takes a simple majority of the committee to vote in favor of a rate change. Forecasters have said Bowman and Waller may dissent from this week’s likely decision to hold pat. The FOMC has not registered more than one dissent in more than three decades, something that may reflect ongoing uncertainty about the current state of the economy, but could also suggest political concerns have entered the discussion.
If the FOMC does not lower rates this month, it is likely to before the end of the year. As of Tuesday, markets pegged the chances of a cut in September above 60%.
When is a cut not a cut?
A cut in the Fed’s key rate may not immediately translate into reduced borrowing costs for mortgages, cars or credit cards. The reason: The Fed targets short-term interest rates, not borrowing costs spread out over multiple years. In other words, a decline in the Fed’s target interest rate does not immediately lead to a comparable decline in consumer-facing interest rates — even if lenders use the Fed as a benchmark.
Home loans are especially disconnected from the Fed’s short-term borrowing targets. Instead, banks and other lenders set mortgage rates using a range of factors, with a major one being the yield on 10-year Treasury bonds. Since the onset of the Covid pandemic, the 10-year rate has steadily climbed to about 4.5%, helping lift mortgage rates to about 6.5%.
The greatest driver of interest rates is inflation expectations. If investors expect price growth to erode purchasing power, they will start asking for higher interest rates. Right now, the Federal Reserve believes inflation expectations are mostly in check, although Trump’s tariffs have introduced a persistent level of uncertainty.
The FOMC’s decision to hold its key rate in a range of 4.25% to 4.5% this year has helped keep a lid on inflation, by curbing overall demand in the economy. If Powell were to be removed, analysts say, it is likely that inflation expectations would become “unanchored” if it suddenly becomes easier for businesses to raise prices assuming demand increases. That would lead to faster inflation, and thus higher interest rates in the economy — even if the FOMC were to vote for a cut.
That includes the cost of borrowing for the federal government. Anything that creates major uncertainty among investors about the stability of the U.S. economy can cause Treasury yields to rise. Less demand for Treasury bonds means the federal government has to pay a higher yield to convince investors to buy them.
If Trump were to fire Powell, investors have warned that 10-year Treasury yields would increase. That would help push home mortgage rates higher. There’s also concern that firing Powell would trigger stock market volatility. It already ramped up earlier this month, as speculation about the future of Powell’s job reached a fever pitch.
“Long story short, it’s not a pretty picture,” analysts with Capital Economics said in a recent note to clients on how the market would respond if Trump tried to remove Powell.
Still, even if Powell were sidelined, the next central banker up — Vice Chairman Philip Jefferson, who was appointed by then-President Joe Biden — hasn’t exactly embraced rate cuts recently. In May, he said the Fed’s policy was in “a very good place” and that the central bank could afford to be patient.
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