President Trump is considering lawsuits against the Fed’s $2.5 billion renovation project
President Donald Trump may sue the Federal Reserve with a $2.5 billion headquarters renovation project.
On August 22, Federal Reserve Chairman Jerome Powell opened the door to interest rate cuts in September despite recent rise in inflation, claiming that “the negative side risk to employment is rising.”
Inflation remains “a little rising,” but at the same time “it appears to be changing the balance of risk,” he added. Separately, Powell also announced a reversal of policy changes five years ago.
“Overall, the labour market appears to be well balanced, but it’s a strange balance due to the significant slowdown in both the supply and demand of workers,” Powell said in a prepared text. “This extraordinary situation suggests there is a risk of employment downsides, and as those risks come into effect, they can be made quickly in the form of rapid, high layoffs and unemployment.”
Investors supported the prospects for a likely rate reduction at the Fed’s meeting on September 16-17. In late-night morning trading, the Dow Jones Industrial Arage jumped to 875 points, while the S&P 500 index rose 1.7% at 6,475.
A quarter-point rate cut next month will reduce the borrowing costs for millions of Americans with credit cards, car loans and specific mortgages, among other types of loans. Additionally, banks have become more generous over the past few years, with lower savings. The futures market has set a 90% chance of cutting in September and also priced at an additional quarter of the percentage of December.
Powell’s remarks represent a noticeable change in his stance over the past few weeks.
In late July, employment growth slowed. Powell said the authorities are primarily focusing on unemployment rates (hierarchically low 4.2%). It does not weaken occupations as Trump’s immigration crackdown has reduced the number of salary increases needed to stabilize unemployment. In other words, if your company lists fewer jobs, and fewer people are looking for jobs, it’s not too much of a hassle.
And Powell pointed out that unemployment is mostly on the Fed’s target of full employment, but inflation below 3% is a way from the 2% target, which will strengthen lawsuits and increase rates.
But that was before Skeke’s July work report.
Employers added 73,000 jobs last month, with employment increases in May and June being revised by 258,000.
Powell noted that Fed officials face a troubling choice when debating whether to resume their interest-cutting campaign in September after a long suspension.
Powell said President Donald Trump’s tariffs are increasing inflation. “The impact of tariffs on consumer prices is now clearly visible,” he said.
Last month, products that are likely to be affected by their duties, such as furniture, video and audio products, rose sharply. Others, including apparel and toys, rose more modestly.
However, Powell added that it is difficult to determine whether it represents a one-off bump to prices or a permanent rise that affects consumers’ inflation expectations and raises wages in a toxic cycle.
As employment growth slows and inflation rises, Powell admitted tension between the two orders.
“In the near future, the risks to inflation will be leaning upside down, and the risks to employment will be a challenging situation,” he said. “When our goals are so tense, our framework calls for a balance on both sides of our dual mission.”
Powell did not commit to reducing fees next month. Fed officials will still consider the August employment and inflation report in early September before the mid-month meeting and provide a more rounded photo.
However, he said, “policies in restrictive areas may ensure that the balance between baseline outlook and changing risks will adjust our policy stance.”
In a note to clients, capital economics economist Stephen Brown wrote Powell’s statement “clearly shows that interest rate cuts in September are the most likely outcome.” However, he added that Powell’s “lingering attention suggests that a very positive August employment report or more pricing data could still cause delays.”
The Fed will lower fees to support a slack economy and job market. They raise or increase prices to cool the economy and tame inflation. Authorities reduced key rates by percentage points late last year, but have been put on hold since December as import taxes assess the impact on prices.
Trump’s tariffs are expected to boost prices and stunt growth as they reduce the purchasing power and spending of consumers, which account for around 70% of economic activity. It has created a challenging dilemma for Fed officials.
Trump has been badgering Powell and other Fed officials to cut fees for months, but Powell says independent agencies are not affected by politics and will do what’s best for the economy.
What is the new monetary policy framework?
Powell has also announced a shift in interest rate policy over the long term.
In 2020, during the decade of the Great Recession of 2007-2009, the economy was growing slowly, and inflation remained stubbornly low. It poses risks as consumers could postpone purchases and hobbing the economy as sustained low inflation could lead to deflect and price declines.
So, instead of targeting 2% inflation, the Fed decided to aim for an average of 2% over time. If inflation is on the Fed’s target, authorities will allow, as Powell said, to run “a medium 2% or more for a while” to compensate for the very low period of inflation. The Fed also said the goal of “maximum employment” is determined by “slump” from that level rather than “deviation.”
This means that authorities were less concerned about the very low unemployment rate and believed it was unlikely to help create more jobs for low-income and minority workers.
But the Fed’s willingness to make inflation hotter and run longer could have contributed to the surge in prices after Covid-19, said Jonathan Millar, economist at Barclays. And with the expectations of inflation and consumer inflation in the past few years being higher than normal, the Fed has focused on fighting price increases, which is costly.
So, Powell said on August 22 that the Fed has returned to its previous policy of targeting 2% inflation, eliminating references to its “make” strategy. Authorities also removed the idea of focusing on “slows” of employment while providing room for unemployment to be below ideal levels consistent with low inflation.
The Fed recognizes that “employment can surpass the real-time assessment of the largest employment without necessarily pose a risk to price stability,” the new Fed policy statement said.
This story has been updated with new information.
