The US Federal Reserve has commenced its highly anticipated two-day policy meeting, with market expectations suggesting that interest rates will remain unchanged. This decision would defy President Donald Trump’s repeated calls for further rate cuts. The Federal Open Market Committee (FOMC) gathering began as scheduled, with the central bank having already lowered rates in its last three policy meetings to a range of 3.50% to 3.75%.
The Fed’s cautious approach is largely due to solid GDP growth, relatively low unemployment, and persistent inflation, which have led officials to adopt a wait-and-see stance. However, this lack of urgency may put the central bank at odds with President Trump, who has been vocal about his desire for large rate reductions. Trump’s administration has also launched investigations into Fed Chairman Jerome Powell and Governor Lisa Cook, sparking concerns about the bank’s independence from political pressure.
According to EY-Parthenon chief economist Gregory Daco, “the Fed has been politically pressured to cut rates, but it is not pressed by the data.” Officials appear to have converged on a near-term halt in rate reductions, with their debate now focusing on the conditions that would justify further cuts. Daco notes that the hurdle for additional near-term cuts has risen, and officials will be looking for clearer evidence of disinflation or renewed deterioration in the labor market before lowering rates again.
The Fed has seen deepening divides over interest rates, but analysts expect less dissent in the current decision. Fed Governor Stephen Miran, appointed by Trump, is likely to push for lower levels, although it is unclear if others on the board of governors will join him. Financial markets generally expect the Fed to continue keeping rates unchanged until its June meeting.
Looking ahead, the nomination of a new Fed chair to succeed Powell, whose term ends in May, will be closely watched. The new chair’s stance on interest rates and ability to navigate the committee towards more cuts will be crucial. However, establishing credibility will be a significant challenge, given the Trump administration’s targeting of Powell and the potential perception of political influence on the bank’s decisions.
The Fed’s independence and ability to pursue its mandate of low and stable inflation and maximum employment, free from political pressure, will be essential in maintaining its credibility. As the central bank navigates these challenges, it must also consider the potential risks of inflation accelerating again and the labor market being stronger than anticipated. With these factors in mind, the Fed’s decision to keep interest rates unchanged is likely to be a cautious and data-driven approach, rather than one influenced by political pressure.
