Donald Trump is intensifying the demands on Federal Reserve Chair Jerome Powell and his crew. So he’s calling for hawkish interest rate cuts. As federal officials wrestle with conflicting economic indicators and inflationary forces, this political clout comes at a moment when the economy is often described as “resilient.”
For instance, across the June 17-18 meeting, Fed officials regularly thought about how tariff-created inflation would affect the economy. They estimated the impact to be “short-lived and small.” However, despite this characterization, inflation is still well above the Fed’s target of 2%, leading to speculation about possible further monetary policy tightening down the road.
Today’s economy is painted on a canvas of weakening economic fundamentals. Personal expenditures went down by 0.1% in May and retail sales plummeted by 0.9% in that month. These sharp declines have prompted growing worries from Fed officials about the sustainability of overall economic growth and labor market bolstering.
By virtue of the consumer price index showing only a 0.1% increase in May, even that is more complicated—the Fed’s decision just got harder. Policymakers stuck to a mostly hawkish sideline at their last meeting, with members signaling a dovish bias to any future rate hike.
Even with these contradictory signals, the labor market showed surprising resilience. In June, the unemployment rate surprised analysts by falling to 4.1%. Counterintuitively, at the same time the economy lost 147,000 jobs, easily beating the consensus forecast of 110k. This strong job growth is out of step with other economic indicators and showcases a tumultuous economic landscape.
Officials have reshaped their forecasts for how many times rates could be cut. They’re forecasting two cuts this year and three additional reductions over the next two years. Recently, at least a “pair” of FOMC officials indicated that the next reduction should come as early as this month. This year no cuts at all would be warranted, some officials counseled, showcasing the divide among policymakers over what’s necessary.
“Most participants assessed that some reduction in the target range for the federal funds rate this year would likely be appropriate.” – minutes from the June 17-18 meeting.
Through all of these discussions, Powell has stuck to his pledge to avoid political influence when crafting monetary policy choices. He said it was critical to stick to the economic signals, not outside forces.
According to the minutes from the June meeting, participants acknowledged that “although uncertainty about inflation and the economic outlook had decreased, it remained appropriate to take a careful approach in adjusting monetary policy.” This sentiment is indicative of the Fed’s caution as they are complicating the uncertain economic times that they find themselves in.
Trump has been advocating deep, aggressive rate cuts to stimulate economic growth. At the same time, Fed officials will need to navigate politically convenient pressures with their unique, long-term mission to foster an ever-watchful economic stability. These conversations continue in many ways to determine the future course of U.S. monetary policy. Political leaders will be keenly attuned to the impacts of different economic indicators.