Powell fixes Trump with Fed renovation costs
President Donald Trump cited the costs of reforming the Federal Reserve during his rare visit, urging Chairman Jerome Powell to push him back.
On the surface at least, Federal Reserve Chair Jerome Powell played it in the middle with a big question looming about the central bank’s decision to hold the rates steady for the fifth straight meeting.
Are the central banks ready to resume their interest rate cuts in September, as the futures market and many economists expect?
“We didn’t make a decision about September,” Powell told reporters. He said economic data will guide Fed officials, and that there will be two more inflation reports and two more employment reports by the meeting in mid-September.
He also nodded to the risks on both sides of the ledger. Raising rates too early could rekindle inflation, and inflation rates in 2022 reached a 40-year high of 9.1% due to a pandemic-related product and workers shortage.
Powell cited “the risk of drawbacks to the labor market.”
When will interest rates fall?
But while the economic course over the next six weeks will determine what the Fed will do, many forecasters and futures markets believe Powell will deliver a “Hawkish” message on Wednesday, reducing the likelihood that civil servants are ready to act in September.
After the Fed’s July 30 meeting, Fed fund futures reduced the chances of a September cut from around 65% to 45%.
“We believe that risk uncertainty and balance will ensure that most of the committees will remain in standby mode for at least a few months. The next rate cut will not come until December.”
How do high interest rates affect consumers?
For millions of Americans, that means relatively high borrowing costs for car loans, credit card balances, mortgages and other debts for at least several months. But that also means that the bank savings rates are high for older people and others who rely on bond assets.
With the already slowing job markets and the economy, the Fed chief previously acknowledged that authorities are likely to be cutting as inflation has eased, but is waiting to see how much President Donald Trump’s cleaning fees are feeding consumer prices.
That may take a while.
The Fed will lower rates to bolster a drooping economy, keep them longer to raise rates and lower inflation.
Here’s why I think Powell has sent a careful message about lowering rates in the short term:
- Powell noted that while the labour market is meeting the Fed’s full employment target, the unemployment rate is only 4.1% – inflation is 2.7%, still surpassing the 2% target. “That’s my way of thinking, and now I want a modest, restrictive attitude, a modest, restrictive attitude,” he said.
- Despite the Fed’s higher interest rates than usual, “the economy is not working like (in some cases) restrictive policies are inappropriately hampered,” Powell said. The Fed chief doesn’t sound concerned that high prices are hurting consumers and businesses. “It suggested he rarely (trimming the rate) right away,” said Samuel Tomes, an economist at Pantheon Macroeconomics.
- Job growth is slowing, but Powell noted that growth in labor supply has also been downshifted due to Trump’s crackdown on immigration. It has stabilized unemployment at a low level, and Powell said unemployment should be the Fed’s main focus. In other words, a decline in unemployment rate could prevent the Fed from being cut short immediately despite poor job acquisitions, Pierce said.
- Powell initially seemed to throw bones at rate cut supporters. “The reasonable basic case is that the impact on inflation may be short-lived, reflecting one-off changes in price levels,” he said. That sounds like the rate cut might be around the corner. But he later said, “It could also be that the inflation effect could become more permanent, and that could be a risk of being evaluated and managed.”
- By September, “The idea is that in our view it is not sufficient to convince the committee that tariffs are proven to be one lift into inflation, or that the labour market is crucially weakened to ease policy,” Pierce wrote.
- Powell said the impact of tariffs on inflation could take a little longer. “We’re away from seeing where things settle,” he said. “I don’t feel like I’m near the end of that process.”
- Tariffs have not started pushing prices up, Powell said the Fed is already “seeing” inflation on goods by not raising prices. “It could be a pushback to people who might want a lower fee right now,” wrote Michael Ferroli, an economist at JP Morgan Chase.
