Will Trump and Vance's influence potentially lead Powell to decrease interest rates?
Get the lowdown on Jerome Powell's latest move with Cohn & Warsh on Kudlow, as they dissect Federal Reserve policy.
The Fed is gearing up for its announcement on interest rate decision this Wednesday, with politicians breathing down its neck to slash rates and prop up the economy. Supporters of the Trump administration are putting the heat on for a cut, but most anticipate no changes this week.
With the federal funds rate hovering at 4.25% to 4.5% since December's last interest rate cut, the Fed has hesitated to pull the trigger on a decrease due to lingering uncertainties surrounding tariff impacts on both sides of its two-part mission to strike a balance between maximum employment and consistent prices, with an ultimate aim of maintaining a 2% inflation rate. Although inflation has softened from its 2022 highs, it still hangs above the Fed's goal.
President Trump and Vice President Vance have turned up the heat on the Fed, lambasting Jerome Powell as "Mr. Too Late" in their push for a less restrained approach to monetary policy. After the stronger-than-expected May jobs report, Trump took to social media to advocate for a full percentage point rate reduction to fuel economic growth.
"'Too Late' at the Fed is a disaster," Trump declared on Truth Social. "Europe has had 10 rate cuts; we have had none. Despite him, our nation is doing great. Go for a full point, Rocket Fuel!"
Trump's plea for a one-point reduction was repeated last week following the release of inflation data suggesting a less-than-expected rise in the consumer price index (CPI).
"CPI JUST OUT. GREAT NUMBERS! FED SHOULD LOWER ONE FULL POINT. WOULD PAY MUCH LESS INTEREST ON DEBT COMING DUE. SO IMPORTANT!!!" Trump wrote on Truth Social.
Vice President Vance echoed Trump's sentiments, stating on X last week, "[The Fed's] refusal to cut rates is monetary malpractice."
Powell has remained firm, stating repeatedly that the Fed isn't champing at the bit to reduce rates and is keeping a close eye on risks to both sides of its dual mandate, such as resurgent inflation or labor market deterioration. The uncertainty created by Trump's tariff policies, which have seen both delays and increased tariff rates, loom large over the economy with the potential for higher prices down the line.
Powell addressed these concerns at a press conference following the Fed's May meeting, stating, "We'll need to see how this unfolds. There are cases in which it would be appropriate for us to cut rates this year. There are cases in which it wouldn't, and we just don't know. Until we know more about how this is going to settle out and what the economic implications are for employment and for inflation, I couldn't confidently say that I know what the appropriate path will be."
Although Powell is expected to stay put this week, the Fed's July meeting is more likely to see a rate cut, with a 23.4% probability compared to a 76.4% chance of maintaining the status quo. September's meeting is viewed as the most probable opportunity for a rate decrease, with a 58.7% probability that the target rate will be lowered by 25 basis points.
Goldman Sachs and other financial institutions have likely emphasized the risks associated with undermining central bank independence, albeit specific statements aren't readily available. Potential consequences include:
- Loss of Credibility & Trust: Central bank independence bolsters investor trust in monetary policy. Political meddling risks eroding this trust, contributing to market volatility and reducing the effectiveness of monetary policy.
- Market Volatility: Political pressure creates uncertainty, triggering fluctuations in financial markets.
- Inflation & Economic Stability Risks: Central banks aim to control inflation while boosting employment. Interference may lead them to implement flawed policies, potentially resulting in inflation or economic instability.
- Global Economic Impacts: Central bank actions can impact the global economy. Undermining its independence can lead to international economic instability and affect trade and currency values.
- Delayed or Incorrect Policy Decisions: Political pressure might force the Fed to delay or make suboptimal policy decisions, potentially worsening economic issues like stagflation.
In this uncertain climate, investors are encouraged to:
- Monitor Economic Indicators: Keep a close watch on inflation rates, employment figures, and GDP growth forecasts to predict potential policy changes.
- Diversify Portfolios: Spread investments across different asset classes to lessen risks associated with market volatility.
- Adapt to Changing Conditions: Be prepared to modify investment strategies as economic conditions and policy directives change.
Stay tuned for more updates as the rate saga unfolds!
- The Federal Reserve is anticipated to announce its decision on interest rates this Wednesday, with pressure from politicians to lower rates to stimulate the economy.
- President Trump and Vice President Vance have been vocal in their criticism of Jerome Powell, urging for a less restrained approach to monetary policy and advocating for significant interest rate cuts.
- Goldman Sachs and other financial institutions have emphasized the risks associated with undermining central bank independence, such as market volatility, loss of credibility, and potential economic instability.
- Despite Trump's pleas for a one-point reduction, most anticipate no changes this week, but the Fed's July and September meetings are more likely to see a rate cut.
- In addition to war-and-conflicts and policy-and-legislation, general news outlets are closely following the ongoing drama surrounding interest rate decisions and their impact on the economy, markets, and finance.
- To navigate this uncertain climate, investors are advised to monitor economic indicators, diversify portfolios, and adapt to changing conditions as economic conditions and policy directives evolve.
