Fed likely to stand pat on interest rates, stay coy on September cut amid Trump pressure

USA Today

2 days ago

When the Federal Reserve feels confident it's getting closer to raising or lowering interest rates based on a clear-cut outlook for the economy and inflation, it often signals its plans at the prior meeting to avoid surprising markets.
Now is probably not one of those times.
At a two-day meeting that concludes Wednesday, the Fed is widely expected to hold its key interest rate steady despite President Donald Trump's monthslong campaign aimed at browbeating Fed Chair Jerome Powell and his colleagues into cutting rates. At a meeting with Powell at the Fed on Thursday, Trump said he's unlikely to try to fire the Fed chief, whose term expires in May.
Two of the Fed's Republican governors, Christopher Waller and Michelle Bowman, have backed Trump's call for a rate cut as soon as this week's meeting and they could dissent, said JPMorgan Chase economist Michael Feroli. It would mark the first time two Fed governors have dissented since 1993, Feroli said.
Will the Fed reduce interest rates again?
The drama, however, will center around whether Powell or the Fed's post-meeting statement will hint at a likely rate cut in September – a move that's forecast by fed fund futures markets. Investors expect a total of two rate decreases by year's end.
'It's really going to come down to Chair Powell,' said Nationwide Chief Economist Kathy Bostjancic. 'What type of…guidance does he provide?'
Yet Trump's trade war has left a haze of uncertainty over the economy since January. And while the contours of his tariffs are taking shape, many of the import fees and their effects on inflation and the economy are still playing out.
'It's a long way to September,' Morgan Stanley wrote in a note to clients. 'The Fed needs more time to determine how the economy is evolving versus its goals.'
In a research note, Ryan Sweet, chief U.S. economist at Oxford Economics, said he doesn't expect the 'central bank to tip its hand, as it will want to remain flexible because of the lingering uncertainty of where tariffs will ultimately settle, the magnitude of the boost to core goods prices, and whether tariffs are bleeding into other prices.'
What happens when the Fed adjusts interest rates?
The Fed chops rates to lower borrowing costs and juice a flagging economy and job market. It raises rates or keeps them higher longer to curtail inflation by cooling the economy. But economists expect Trump's levies to both reignite inflation and hamper growth as cost-burdened households reduce spending, leaving officials torn between their two mandates.
Powell has said the Fed is taking a wait-and-see approach to assess which tariff-related hazard poses a bigger problem. The Fed lowered its benchmark short-term rate by a percentage point late last year after a pandemic-related inflation spike eased but has since been on hold.
What are the current tariffs in the US?
Some of Trump's tariff plans and their effects on prices are becoming clearer.
In the spring, Trump announced a 90-day pause on high double-digit reciprocal tariffs for China and many other countries, easing recession fears and reversing a stock market sell-off. White House officials extended the reprieve to Aug. 1 to provide more time for negotiations.
In recent weeks, the Trump administration has announced trade deals with the UK, Vietnam, Indonesia, the Phillipines and China, but the agreements still impose relatively high duties of 15% to 30%.
Earlier this month, the president announced plans to raise the tariff rate on many Canadian imports from 25% to 35% and impose a blanket 15% to 20% duty on most other countries, up from 10%. He also threatened 30% tariffs on all imports from Mexico and the European Union, though the U.S. is still negotiating with those countries.
Trump also has announced a 50% tariff on imported copper and all imports from Brazil. Already in effect: a 50% levy on metals, 25% on cars and 30% on China.
How are tariffs affecting inflation?
For months, the fees had little effect on inflation, but they appeared to leave a bigger imprint in June as Chinese-made products got a bit more expensive, according to the consumer price index. Apparel prices rose by 0.4%; furniture, 1%; video and audio products, 1.1%; and toys, 1.8%. Overall, an underlying inflation measure the Fed follows closely ticked up from 2.8% to 2.9%, and many economists said the tariff effects were still mild.
Yet that's largely because many retailers and manufacturers stocked up on goods before the fees took effect or absorbed the costs – tactics that forecasters say have run their course.
Amid the uncertainty, Powell will likely take a middle-ground approach, Morgan Stanley says.
The June inflation numbers 'should provide some confirmation to the (Fed) that the tariff push to inflation has begun, but not so much that would lead Powell to downplay the possibility of rate cuts this year,' Morgan Stanley wrote.
How is the current economy in the USA?
The economy is sending similarly mixed signals.
A key measure of retail sales increased 0.5% in June. But economist Samuel Tombs of Pantheon Macroeconomics said that's largely because of rising prices. Sales volumes appeared weak, he wrote.
Morgan Stanley predicts a report Wednesday will reveal the economy grew a solid 2.2% in the April-June quarter, but it traces most of the gain to a reversal of a tariff-related import surge in the first quarter that caused the economy to shrink. (Imports are subtracted from gross domestic product because they're made in foreign countries.)
How is the job market in the USA now?
And wWhile employers added a sturdy 147,000 jobs in June, the private sector added just 74,000, mostly in health care. For many months, job gains have been concentrated in just a few sectors – health care, state and local governments, and leisure and hospitality.
That's not a good omen for overall job growth in the months ahead, Bostjancic said. Economists surveyed by Bloomberg expect a report Friday to show the U.S. added just 118,000 jobs in July.
With the labor market slowing, tariff tensions easing and their effects on inflation still modest, Bostjancic believes Powell could warm slightly to the idea of trimming rates in September.
'I would think he can sound a little more open to cutting rates just because of the data,' Bostjancic said.
She expects the average U.S. tariff to rise from about 2% earlier this year to about 20%. That, she said, would push inflation from 2.7% to 3% by December – above the Fed's 2% goal but below the 3.4% many forecasters predicted a few months ago.
At the same time, she noted that Trump's attacks on Powell and the Fed's independence have caused investors to worry officials ultimately may cut rates for political – rather than sound economic – reasons, driving inflation higher.
As a result, market-based measures of inflation expectations have risen in recent weeks, a trend that could push up long-term rates and ironically undermine Trump's demands for lower borrowing costs.
'I don't think he'll send a hard signal,' Bostjancic said of Powell. 'I think he'll leave it open.'