The outlook for the United States economy is one of continued expansion, although recent economic indicators point to a moderation in the speed at which we’re growing. Until recently, President Donald Trump has been an outspoken advocate for lower interest rates to make his economic agenda possible. The Federal Reserve (Fed) is doubling down on its independence from political pressures. The current effective target interest rate set by the Fed is 2. In the past, officials have indicated that they are comfortable with this rate for the time being.
President Trump has been very critical of the Fed’s interest rate policies for some time, calling for cuts to juice the economy even more. The Fed is independent from the White House, making decisions based on careful analysis of data, rather than the short-term political motivations. This independence is very important. Its urgency is only magnified by the historic efforts currently underway to bring down inflation to levels not seen in more than four decades.
As of today, the Fed has largely succeeded in taming the inflation that peaked in June 2022 without plunging the economy into a recession. In fact, the personal consumption expenditures price index, the Fed’s preferred measure of inflation, has fallen dramatically from its summer 2021 highs. Nevertheless, it still posted a 2.5% annual rate in February. We’ve made great progress but still have much to do. We must begin to address social justice concerns, and not just the minimum wage but a lot of other things.
Consumer spending, two-thirds of the U.S. economy, has recently started to decelerate. It hasn’t gotten to alarmingly deep trough. Unemployment remains at near record lows, and employers continue to fill new jobs at a vigorous rate. This is further evidence that the underlying economy is quite strong on the whole.
Dallas Fed President Lorie Logan reinforced the Fed’s current stance on monetary policy, stating that “the stance of monetary policy is well positioned.” Other Fed officials are not far behind. So long as inflation is above their 2% target and the labor market stays resilient, they don’t believe there is a strong enough case to reduce rates.
San Francisco Fed President Mary Daly recently underscored long-standing worries that inflation dynamics have become more pernicious. Her other argument would be that the risks to inflation are skewed more upwards than downwards as compared to a year ago. In other words, we’ll have to keep policy restrictive for longer than we would have otherwise hoped. As the Fed circles its policy wagons amidst non-stop economic uncertainty, this statement represents a timid step forward.
At the recent CBI conference, Boston Fed President Susan Collins stressed the need to keep monetary policy flexible, given the uncertainty. She noted that policy has a good setup to address all sorts of possible economic futures. This is especially important in the current volatile and uncertain context.
Analysts at Evercore ISI are offering their take on the developing drama. Indeed, their argument is that “Fed independence is more important than ever,” even as they acknowledge the new risks that Trump’s tariffs pose to inflation and inflation expectations. This highlights the challenging equilibrium that the Fed needs to hold going forward as it tries to respond to market forces and political forces.