This week, the Federal Reserve decided to hold its benchmark interest rate at 4.25% to 4.5%. This announcement follows significant and unprecedented criticism from former President Donald Trump. The Federal Open Market Committee (FOMC) took this action at their most recent meeting. More significantly, it underscores the vast unknowns that still cloud the land-use economic landscape. The Fed’s decision has already stoked outrage among politicians. It has sparked rebellion in its own household, with two high-ranking officials forcing the agency to move towards a more radical cut of rates.
Many were caught off guard by the Fed’s decision to leave rates on hold. This is a surprising decision given what we know about the outside pressure from the White House. President Trump has been a tireless champion for deep interest rate cuts. He thinks that these measures will be enough to stimulate strong economic growth. Despite all of these demands, the overriding feature of the Fed’s leadership must be a steadfast commitment to its independence and its analytical approach.
In the last FOMC meeting, there were 12 voting members convened in this decision-making process. Governor Adriana Kugler decided not to vote. Michelle Bowman and Christopher Waller were the two FOMC officials voting against the increase. They contended that the Fed should start easing monetary policy sooner, rather than later, in response to shifting economic circumstances.
Indeed, in its most recent statement the Federal Reserve noted that uncertainty regarding economic prospects “continues to be high.” This is a huge reversal from June, when they reported that uncertainty had improved, but it was still identified as a concern. This change further reflects the Fed’s dovish willingness to be patient in reaction to moving economic data.
The federal funds rate is the primary benchmark for the overnight lending rate between banks. This rate serves as a critical anchor for other interest rates around the economy. The FOMC acknowledged that inflation has been modest lately, just 2.1% on a year-over-year basis. Core inflation is 2.5%, up ticked recently. That number, like many other inflation readings, has fallen off a cliff since the first quarter and is approaching the Fed’s target of 2%.
The Federal Reserve’s recent Beige Book — a summary of the Fed’s view of national economic conditions — reflects a much more restrictive perspective. In June, they said that economic growth was occurring at a “moderate rate.” The latest statement indicated that while the unemployment rate remains low and labor market conditions are solid, inflation continues to pose challenges.
“The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated.” – Federal Open Market Committee document
The Fed’s approach underscores the tricky balance between promoting economic expansion and curbing inflation. As federal and provincial officials consider their options, they are caught between competing domestic and global economic pressures.
National Economic Council Director Kevin Hassett reiterated the administration’s respect for the Fed’s independence while appreciating the value of its analysis. “We at the White House 100% respect their independence, but we like to respect their analysis,” he stated.
What makes the recent decision notable is that it’s the first time since late 1993 that at least 2 governors have willingly abstained from voting on a rate decision. This indicates there are still significant differences of opinion within the committee about how to proceed.
As the economy continues to change, all eyes are on the Federal Reserve. We are excited to see how it adapts to increasing stresses and changing economic signals in the quarters to come.