Will the Federal Reserve disregard Trump's demands and maintain interest rates steady during the forthcoming week?
Rewritten Article:
Is a Rate Cut Coming from the Federal Reserve Soon?
The Fed's interest rate decision in the face of political pressures and Trump's tariffs has been under scrutiny in 2023. As President Trump demands lower interest rates, the Fed stands firm, prioritizing its independent decision-making process over political influences.
In a continued tussle, Trump is urging the Federal Reserve to reduce borrowing costs, arguing that inflation concerns have subsided, no longer needing high interest rates to control price increases. The Fed, on the other hand, remains cautious, having steadily increased rates in 2022 and early 2023 to combat a surge in pandemic-era inflation.
Elon Musk, head of Trump's Department of Government Efficiency, further stirred the pot last week by suggesting that the Fed should scrutinize its own spending on facilities. This heightened scrutiny intensifies the spotlight on the Federal Reserve, even as Trump momentarily drops his threats towards Federal Reserve Chair Jerome Powell.
Rate Hike or Hold? The Fed's Decision on Wednesday
With Trump's tariffs potentially raising prices in the coming months, the Fed's decision-making process becomes more challenging. Economists predict that the Fed will keep its key rate unchanged at around 4.3% during its meeting this week, as officials want to assess the impact of Trump's tariffs on the economy before making any moves.
Trump has made contradictory claims about inflation, stating that there is "NO INFLATION" and that prices for groceries and eggs have fallen, with gasoline dipping to $1.98 (€1.8) a gallon. However, statistics show grocery prices have seen a 0.5% increase in two of the past three months and have risen by 2.4% compared to a year ago. Gasoline and oil prices have also dropped by 10% compared to last year, contributing to a longer-term trend in part due to fears of a weakening economy. Despite Trump's claims, AAA reports the average gas price nationwide is currently $3.18 (€2.8) a gallon.
Inflation did show a marked decline in March, a hopeful sign, though it registered 3.6% in the first quarter of 2023, according to the Fed's preferred gauge, significantly surpassing its 2% target.
Textbook Scenario or the New Normal?
Without tariffs, economists speculate that the Fed would likely reduce its benchmark rate since it is currently intended to slow borrowing and spending and control inflation. But with tariffs likely to boost prices, the Fed cannot cut rates indiscriminately, risking further inflationary pressures.
Vincent Reinhart, chief economist at BNY, notes that the Fed is "scarred" by the events of 2021 when price increases were initially anticipated to be "transitory" but later soared to a peak of 9.1%. This time, the Fed will tread carefully, requiring substantial evidence of tariff impacts on the economy before adjusting its monetary policy.
Preston Mui, an economist at Employ America, adds that Trump's constant criticism of Powell makes it challenging for the Fed chair to cut rates, as any rapid action would risk appearing to succumb to political pressure.
The Race to the First Rate Cut
While some economists anticipate that the Fed will not reduce rates until September or later, Wall Street investors foresee an earlier move. If tariffs significantly impact the economy, causing increased unemployment, the Fed could respond by cutting rates sooner, as early as July, according to futures pricing.
Meanwhile, Kevin Warsh, a potential candidate to replace Powell when his term ends next year, criticizes the Fed for being unable to manage inflation effectively, suggesting that the Fed's credibility and economic outcomes have suffered due to its policymaking. Powell defends the Fed's independence, asserting that it enjoys wide support in Washington, D.C., and Congress.
Elaborating further:
Nope, Grocery Prices Aren't Falling
- The Federal Reserve is under pressure from President Trump to weaken borrowing costs, but the Fed remains cautious, considering the potential impact of tariffs on inflation and the economy.
- In the ongoing debate, Elon Musk, head of Trump's Department of Government Efficiency, suggested scrutinizing the Fed's spending on facilities, heightening the scrutiny on the Federal Reserve's independent decision-making process.
- Though President Trump claims grocery prices have fallen, statistics show a 0.5% increase in two of the past three months and a 2.4% rise compared to a year ago, contradicting his claims of deflation.
- The Federal Reserve, aware of the potential risks of indiscriminate rate cuts due to tariffs, will carefully assess the impact of tariffs before making any moves, avoiding the repetition of the 2021 inflationary pressures.
