If the Fed lowers interest rates this year, it'll likely be because of bad news. Here's why
Since January, the Fed has stood on the sidelines, keeping its benchmark lending rate unchanged at about 4.4%. Officials have said in recent speeches that they want to see how President Donald Trump's significant policy changes, including on tariffs, affect the US economy first before considering further rate cuts.
Renewed tensions in the Middle East add even more to the uncertainty that has paralyzed the central bank. Officials are expected to continue with their strategy of staying on hold at the conclusion of their two-day policy meeting on Wednesday, with an announcement at 2 p.m. ET.
But the economy could soon buckle as Trump's tariffs begin to force shoppers to pull back on their spending, eventually sending unemployment higher as company profits take a hit. That would give the Fed, which is responsible for preserving the labor market's strength, the signal to start lowering rates.
New economic projections from Fed policymakers could show they expect to lower rates at least once this year — and it will likely be because of bad news, economists say.
'The Fed will probably start to cut rates in the second half of the year as the tariffs start to weigh on growth and you see the unemployment rate coming up,' Jay Bryson, chief economist at Wells Fargo, told CNN.
While the Fed will likely lower rates eventually, the Fed's expected decision on Wednesday might not sit well with Trump, who has torn into Fed Chair Jerome Powell for not lowering borrowing costs already, describing the Fed leader as a 'fool' and a 'numbskull.'
In April after Trump unveiled a massive tariff hike on dozens of countries, Powell predicted the Fed could be in a situation in which both of the US central bank's goals — stable prices and maximum employment — are 'in tension.'
A stagnant economy combined with rising inflation is referred to as 'stagflation,' which isn't happening outright, but forecasts from most economists, in addition to Fed officials themselves, show the US economy is trending in that direction. Officials' new projections, to be released Wednesday, will likely show they still expect stagflation to slowly take shape this year.
Such a situation puts the Fed in a difficult situation, and Powell has said how the Fed responds depends on which variable is in a worse state. The bigger worry for the Fed may end up being with the labor market.
'The steady unemployment rate notwithstanding, cracks are becoming more evident in the labor market,' Jim Baird, chief investment officer at Plante Moran Financial Advisors, wrote in a recent analyst note. 'Job openings are down, job creation has slowed, and unemployment claims continue to edge higher.'
Fed officials have signaled that they will step in by lowering rates if the labor market shows concerning signs of strain.
For months, Trump has lambasted the Fed and Powell himself for not lowering borrowing costs quickly enough.
Trump has said the Fed is lagging behind its European counterpart and has claimed, without evidence, that the reason Powell is not lowering rates is to help Democrats. (The Fed is an independent agency whose decisions on monetary policy are free of political interference.) Trump has also said the Fed ought to lower rates to reduce the federal government's interest payments on its massive budget deficits, which are expected to grow even larger if Congress passes the president's tax and spending bill.
'We're going to spend $600 billion a year, $600 billion because of one numbskull that sits here (and says), 'I don't see enough reason to cut the rates now,'' Trump said at the White House last week.
However, Fed officials don't consider the government's finances when setting rates. They focus on achieving their so-called dual mandate of stable prices and maximum employment.
Other administration officials have piled on to the criticism of the Fed recently.
'It's unbelievable how much we would save if [Powell] did his job and he cut interest rates,' Commerce Secretary Howard Lutnick told Fox News last week. 'Come on. He's got to do his job soon.'
Last week, Vice President JD Vance accused the Fed of deliberate misconduct for not lowering borrowing costs, writing in a post on X that the Fed is engaged in 'monetary malpractice.'
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
USA Today
12 minutes ago
- USA Today
Fire up the AC: Sweltering US. sets new electricity consumption record
President Donald Trump has made driving down energy prices a key part of his administration's initiatives. Americans cranking up their air conditioners, fans and swamp coolers over a single hour in late July consumed more electricity than ever before as sweltering heat spread from the Midwest to the East Coast. The federal Energy Information Administration said that from 7 to 8 p.m. Eastern on July 28, Americans consumed 758,149 megawatt-hours of electricity – a new national record. And while the numbers are subject to change, the EIA said on July 29, Americans might consume even more power. An average American home consumes about 10,791 kilowatt hours of electricity annually, meaning the energy consumed on July 28 would be enough to power a single house for 70,000 years. The demand for electricity came as large, heavily populated parts of the United States suffered under high heat that could linger until the weekend. All that power came from a mix of sources, although natural gas remains the backbone of our electricity supply, providing 45% of the total, according to the EIA. Coal is the next-largest source, at 17%, while nuclear represented 13%. Solar accounted for 11%, while wind and hydropower each provided 5%. The previous hourly demand record for the continental United States was 745,020 megawatt-hours on July 15, 2024, the EIA said. The United States has been consuming more electricity per person as an increasing number of homes have air conditioners, along with demands from AI computer centers. The EIA noted that electricity consumption had been relatively flat from 2010 to 2020 as increased efficiency offset population growth, but demand has been rising since then. President Donald Trump has made driving down energy prices a key part of his administration's initiatives, and has called for significant increases in natural gas and oil drilling, along with the expansion of coal-fired power plants. His administration has proposed relaxing emission standards for coal-fired power plants, which could potentially lower generating costs. Where you live in the United States plays a significant role in how much you pay for electricity: On average, Utahns pay the lowest electric bills, at about $95 a month, whereas, in Connecticut, the average monthly bill is $218, according to a Texas-based electricity broker.
New York Times
13 minutes ago
- New York Times
You Can't Quit America
This week, the European Union agreed to a trade deal with the United States that amounts to a capitulation to Donald Trump. Yes, Trump had already made certain concessions in advance, by pre-emptively walking back his outrageous opening gambit in the tariff war when markets rebelled against the policy. But since that walk-back, the president has enjoyed a run of victories, establishing a new base line for U.S. tariff revenue with minimal retaliation from our trading partners. The deal that Ursula von der Leyen, the president of the European Commission, sealed with Trump is part of this new normal, in which most countries appear willing to pay extra for access to our markets, and it's not America but the rest of the world that seems to be chickening out. There is a hard lesson here, not just for observers hoping for a more muscular European trade policy, but also for anyone who has spent the early months of the second Trump administration imagining that a populist-governed United States might somehow end up isolated on the world stage. This fantasy of isolation has been a source of both comfort and schadenfreude for anti-Trump liberals, since it offers a vision of potential political escape from populism, with liberal culture reconstituted in Toronto or Oxford or Scandinavia, and a vision of a Trumpian America suffering economic punishment as its walls rise higher and the rest of the world prospers through mutual exchange. But both conceits — a world economic order that isolates America and a liberal order that continues on without us — are fundamental misreadings of the global situation, which the foreign leaders who have bowed to Trump's demands seem to understand quite clearly. The first thing they understand is that American economic power is just too big to escape or isolate or ignore. Before Trump's 2024 victory the economic story was one in which American growth was clearly pulling away from our peer economies in Europe and East Asia. Since Trump's return to power, the economic story is one in which even protectionist policies that almost every economist deplores haven't prevented the American stock market from rising and the American growth machine from churning onward. Want all of The Times? Subscribe.
New York Times
13 minutes ago
- New York Times
The Trump Presidency Takes a Better Turn
Egads! After a disastrous first 100 days, Donald Trump is starting to have a much more successful presidency. This is not what we, his foam-at-the-mouth critics, had planned or perhaps secretly hoped for. Some of this is a function of good policy, like getting NATO's European members and Canada to spend much more on their defense, something previous American presidents asked for, but much too politely. Far from destroying the Atlantic alliance, as his critics feared, Trump may wind up being remembered for reviving and rebalancing it, to the advantage of both sides. Some of this is courageous policy: Joining Israel in its strikes on Iran, which Trump carried out in the teeth of political resistance from parts of his own base, did not lead us into a calamitous Middle East war, though Tehran may yet seek retaliation. Instead, it helped bring the war between Israel and Iran to a swift end and, as The Washington Post's David Ignatius has reported, did 'such severe damage' that Iran's nuclear program 'will be neutered for at least a year, and probably far longer.' Some of this is belated good policy: Speeding the delivery of arms to Ukraine, after Trump's disastrous initial pressure campaign on Ukraine backfired by emboldening Vladimir Putin, is the only way to end the war. The next step for Trump is to make good on his sanctions threat, ideally by seizing Russia's frozen foreign assets so that they can finance Ukrainian arms purchases. Some of this is good policy that's gone too far: We no longer have a migration crisis, an achievement that should not have eluded the Biden administration for most of its term and that cost the Democrats dearly. But Americans want an immigration policy that secures the border and deports criminals, not one that goes after law-abiding, hardworking undocumented immigrants on whom many areas of the economy depend and who should be given a viable path to citizenship. Some of this is bad policy that could have been much worse: The trade deals that Trump has recently struck with Japan and the European Union will raise costs for American consumers and hurt American businesses, especially smaller ones. But they also expand markets for American exports, including cars and agricultural products. After months of the White House's erratic and capricious trade sanctions and bellicose rhetoric, the trade deals bring predictability and clarity. Want all of The Times? Subscribe.
