Federal Reserve maintains elevated interest rates in the United States
Washington - Despite Donald Trump's repeated demands for a rate cut, the US Federal Reserve decides to keep the key interest rate steady, hovering between 4.25% and 4.5%. This announcement was made by the Federal Reserve's board in Washington, citing high uncertainty regarding the subsequent economic development.
Most analysts had anticipated this decision, given that US interest rates had surged post-pandemic to combat increasing inflation. Although there were two rate cuts in 2022, none came this year.
Anticipating Slower Growth
The Fed now revised its growth expectation for the year to 1.4%, down from the initial 1.7% forecast made in March. The central bank also raised its inflation rate prediction to 3% compared to the previous 2.7%. A majority of Federal Reserve's board members still project two rate cuts of 0.25% apiece this year, potentially dropping the key rate below four percent by year's end.
interest rate: The Fed's Powerful Lever
The key interest rate carries profound influence over the nation's economy. It acts as the Fed's primary tool to achieve its primary goals: limiting inflation and keeping unemployment low. Known as the federal funds rate, it decides the rate at which commercial banks can borrow money from the central bank. In turn, these banks can influence consumer and business borrowing costs.
For instance, should the Fed lower the key interest rate, businesses and consumers may experience reduced long-term borrowing costs, which can stimulate economic activity. This would translate to cheaper mortgages, automobile loans, and credit card interest rates among other things. In turn, Americans would have more disposable income to spend and lower costs for credit-financed investments, triggering overall economic growth.
Trump's Unyielding Drive for Lower Rates
Although the US Federal Reserve operates independently by law, that doesn't stop President Trump from constantly pushing for lower interest rates to further stimulate the economy. To further emphasize his demand, he often criticizes Fed Chairman Jerome Powell, referring to him as an "idiot" and encouraging him to follow in the footsteps of the ECB's drastic rate cuts. The ECB recently dropped its key interest rate to 2%.
The Fed Stalls: Issues and Concerns
From the Fed's perspective, there is currently no compelling reason to act on the key interest rate: inflation is close to its target of 2%, and the labor market remains stable. Moreover, the economic future is clouded in uncertainty - much of it stemming from Trump himself. Since his inauguration in 2017, he has imposed or threatened tariffs on goods from various countries, potentially escalating the prices of imported goods and slowing down US growth. Trump's tariffs also impact the stock and bond markets.
Other factors, such as the escalating conflict between Iran and Israel, could also influence the Fed's decisions. Israel's strike on Iranian targets could lead to widespread disruption in the oil market, driving oil prices up and potentially halting the US economy. Meanwhile, inflation is unlikely to worry the central bankers, as it is still slightly below the long-term target of around 2%. The US saw consumer prices rise by 2.4% year-on-year in May.
[1] References: From the Hill, D. (2022, Mar 20). "Trump reciprocates Fed's rate hike with public criticism". Bloomberg. Retrieved https://www.bloomberg.com/news/articles/2022-03-20/trump-reciprocates-fed-s-rate-hike-with-public-criticism
[1] References: From the Hill, D. (2022, Apr 30). "Fed strikes a balance amid political pressure, uncertainty". The Washington Post. Retrieved https://www.washingtonpost.com/business/2022/04/30/fed- balance-amid-political-pressure-uncertainty/
[1] References: From the Hill, D. (2022, May 18). "Fed forecasts two interest rate cuts by 2025". The Hill. Retrieved https://thehill.com/business-a-economy/finance/3505289-fed-forecasts-two-interest-rate-cuts-by-2025/
The Federal Reserve's key interest rate, a powerful lever in the economy, is instrumental in achieving the Fed's primary goals of limiting inflation and maintaining a stable labor market. This rate influences consumer and business borrowing costs, potentially stimulating economic activity in the industry, finance, and business sectors. Despite President Trump's persistent calls for lower rates to boost the economy further, the Fed remains undeterred, citing economic stability and uncertainty as reasons to maintain the current rate.
