The US Federal Reserve disregards Trump's calls to decrease interest rates.
Washington (dpa) - The Federal Reserve (Fed) maintains a relatively high key interest rate, bucking President Donald Trump's demands for a rate cut to stimulate the economy.
In the wake of the pandemic-induced high inflation, the Fed has made two interest rate cuts in '24, but none this year, much to the surprise of most analysts. The central bank's decision not to alter the key interest rate, despite Trump's relentless pressure, stems from several factors.
The Key Interest Rate's Impact
The key interest rate serves as the Fed's primary tool to manage its dual mandate: limiting inflation and keeping unemployment low. By influencing commercial banks' borrowing costs, it indirectly impacts consumer and corporate loans, mortgage rates, and even credit card interest rates. Lower interest rates make loans cheaper and can boost economic growth by increasing spending and affordable investments.
Trump's Motives
While the Fed operates independently, politicians may still voice their opinions. Trump, for instance, has long voiced his desire for lower interest rates to further stimulate the economy. He has publicly criticized Federal Reserve Chairman Jerome Powell, even going so far as to call him "stupid" on the eve of the Fed's decision.
Reasons Behind the Fed's Decision
Several factors play into the Fed's ongoing decision to maintain the key interest rate:
- Despite lower expected economic growth this year and a slight increase in inflation, the Fed sees no immediate need for action. Inflation is close to its 2% target, and the labor market remains strong.
- Tariff uncertainty heightens economic instability and impact on prices and business/consumer behavior. As tariffs have been a significant source of uncertainty and more are expected in the future, the Fed awaits clearer data before making adjustments.
- The Fed is mindful of its independence. Although Trump implores rapid rate cuts, the Fed remains committed to making data-driven decisions.
- Geopolitical instability also factors into the Fed's considerations. Escalating conflicts like the ongoing tensions between Iran and Israel or potential US military involvement may lead to major oil market disruptions, causing a slowdown in the economy.
Economic Expectations
The Fed now projects a 1.4% economic growth for the year, a downward adjusted forecast from 1.7% in March. It also anticipates a higher inflation rate of 3.0%, up from 2.7% in March.
Disregarding political pressure, the Fed balances its dual mandate of promoting maximum employment and price stability, carefully weighing risks to achieve its goals.
- Politics and business are intertwined, as shown by President Donald Trump's desire for lower interest rates to stimulate the economy, despite the Federal Reserve's (Fed) maintenance of a relatively high key interest rate.
- The upcoming elections may see increased focus on finance and general-news, considering the Fed's decisions are influenced by several factors such as inflation, labor market, tariff uncertainty, geopolitical instability, and the Fed's commitment to making data-driven decisions, which could cause economic expectations to shift.
