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.
A year ago, when Federal Reserve Chairman Jerome Powell gave a keynote speech at the Central Bank’s annual meeting in Jackson Hole, Wyoming, his message was simple and market-friendly.
Inflation has eased, employment growth has slowed, and unemployment has traditionally risen at a recessional pace.
After hiking 23 years high on key interest rates to combat the pandemic’s inflationary spike, the Fed was finally poised to lower it, Powell said. Inventory has skyrocketed.
In a Jackson Hole speech on August 22, Powell faces a more formidable challenge as it appears to provide another signal about the Fed’s September interest rate plan after a longer pause to ensure consumer prices have been tamed.
However, this time, the photos are much more confusing, with economists splitting whether Powell could slow down next month or telegraphing on the continued Fed’s waiting approach. Minutes from the Fed’s July 29-30 meeting, released on Wednesday, August 20, showed that most officials view high inflation as the biggest risk, rather than a weak job market.
Rate reductions could reduce the broad borrowing costs for millions of Americans, including specific mortgages, credit cards, and car loans, but they will reduce the bank savings rate, which has become more generous over the past few years.
Powell is also expected to announce policy changes that will keep interest rates high over the long term, as authorities focus on keeping inflation under control.
What about the job market in the US right now?
Job growth has weakened significantly, but at 4.2%, the unemployment rate has been stable at a historically low level. And inflation has risen higher, at least in part, at least in part, due to President Donald Trump’s sweeping import duties.
Before cutting fees, authorities want to ensure that tariffs amount to a one-off conflict with inflation, and don’t raise Americans’ expectations of inflation in ways that ripple the economy.
How does the Fed decide on interest rates?
The Fed will lower fees to support the flag’s economy and job market. They will raise or raise prices to cool the economy and fight inflation. Authorities reduced the key rate by percentage points late last year, but have been put on hold since December to assess the impact of import fees on prices.
Powell in July also said officials were focusing on unemployment rather than employment growth, primarily because Trump’s policies reduced the number of pay increases needed to keep unemployment low. Simply put, fewer people are looking for jobs, so fewer jobs available isn’t the worse.
The unemployment rate meets the Fed’s “maximum employment” target, but the Fed’s priority inflation measures are just under 3%, well above the 2% target, Powell said. Implications: Authorities are not in a hurry to lower the fees yet.
That was before the historically bad July employment report came out earlier this month.
What was the July Jobs Report?
Employers added employment and employment increases in May and June, revising 258,000 large jobs. The unemployment rate has risen from 4.1% to still 4.2%. The revision, which averaged 35,000 job growth over the past three months, has resulted in a futures market that will provide 81% odds for interest rate reductions in September.
Will Powell be sticking to his careful message and disappointed investors despite his weak employment report in July?
Or is he suggesting rate cuts that could seem backtracked from his guidance on staying focused on inflation and unemployment rather than employment benefits?
“He’s in a difficult place,” said Jonathan Miller, a US economist at Barclays.
Another wrinkle: Trump has made Powell and the Federal Reserve into badgers to cut interest rates, calling him “stupid” and “numbskull.” Powell says the Fed is not affected by politics. Powell was not the only target of Trump’s rage at the central bank. On August 20, the president called for the resignation of federal governor Lisa Culinary following accusations of fraud from his administration.
The August inflation and employment report is scheduled to be released before the Fed’s mid-September meeting, providing a more complete picture to civil servants, saying “I don’t think he’ll give a really strong signal,” said David Seif, Nomura’s leading economist.
However, predictors are predicting at least some clues. If Powell doesn’t push back market expectations for rate cuts in September, investors are likely to interpret it as an implicit confirmation, Millar said.
Is inflation actually getting better?
Overall inflation was stable at 2.7% last month, but according to the Consumer Price Index, it is the core measure that has led to the Fed’s impact from 2.9% to 3.1%, removing volatile food and energy items. The impact of tariffs was mixed. Typically, some of the goods imported from China, such as furniture, video and audio products, have risen sharply. Others, including apparel and toys, rose more modestly.
Most economists viewed the report as a relatively benign and virtually a clear signal for the Fed to chop in September. “We don’t see any real signs of inflation caused by tariffs,” Saif said.
However, Miller noted that wholesale cost gauges have risen at the fastest pace in over three years, reducing further rise in consumer prices.
Also, Austan Goolsbee, president of the Federal Reserve Bank of Chicago and a voting member of the Fed’s interest rate setting committee, told reporters last week he was worried about a significant price rise in categories such as airfares and dental services, which could reflect a more fundamental and sustained rise in inflation. He also said he is not so concerned about the low employment growth rate due to population changes that result from changes in immigration policies. That’s notable, as Goolsbee is seen as a “fantastic” Fed official who frequently supports cuts to avoid a recession rather than moving inflation.
Economists also disagree with regard to the job market.
Goldman Sachs is worried that employment in the healthcare, education and public sector, which has supported improving solid jobs for months, is currently declining. And many other private sector employers have plans to put their employees on hold as they await the impact of Trump’s tariffs.
Seif said unemployment rates could provide a deceptive signal for labor market health.
In July, the share of working Americans and Americans looking for jobs fell to the lowest level since November 2022. Although layoffs are still low, recruitment is below the level of simultaneous advance. This result: Many unemployed people and recent university graduates are now disappointed and leaving the workforce, Safe said.
“Unemployment is creeping up, and many people are dropping out of the labour market,” Seyf said. He expects the Fed to trim its keyrate at a quarter percentage point next month, in the 4% to 4.25% range. “The profits of 35,000 (average) employment over three months are pretty bad.”
But Miller said Trump’s immigration crackdown could be skewing the number of workers involved. Many immigrants may be hesitant to answer questions from government officials conducting employment investigations.
He hopes Powell will signal a high bar for interest rate cuts in September. “Many of the job market is consistent with full employment,” he said, noting that the unemployment rate is low.
What is the Federal Reserve policy framework?
Powell will also announce a reversal of policy changes five years ago, which will allow interest rates to stay somewhat higher in the long term.
Since the Great Recession of 2020, 2007-2009, the economy has grown slowly over a decade, and inflation has remained stubbornly low. That’s a potential problem. This is because inflation with sustained low inflation perpetuates a small cycle of price increases, as it can encourage consumers and businesses to expect it to continue. It could lead to deflation or price drops, which could encourage consumers to postpone purchases and hoblem the economy.
So, instead of targeting 2% inflation, the Fed decided to aim for an average of 2% over time. As a result, if inflation is set to Fed targets, officials will allow them to do “medium 2% or more for a while,” as Powell said. The Fed also said the goal of “maximum employment” is determined by “slump” from that level rather than “deviation.”
In other words, authorities don’t worry too much about very low unemployment and believe it’s unlikely to cause high inflation and will help create more jobs for low-income and minority workers.
However, the Fed’s willingness to run inflation longer could have contributed to the surge in prices after Covid-19. And with expectations for inflation and consumer inflation have been higher than normal over the past few years, Powell is planning to announce that the Fed is targeting 2% inflation and is returning to its previous policy of responding to “deviation” from the goal of not only being too low but too high unemployment.
