Fed holds interest rates despite pressure from Donald Trump
The US Federal Reserve voted to leave interest rates on hold despite facing pressure from President Donald Trump to reduce borrowing costs.
The pause comes after three consecutive interest rate cuts and means the federal funds rate stands in a range of 4.25-4.5 per cent.
Although the decision was widely expected by investors, rate-setters have faced political pressure to lower rates since President Trump’s election victory.
“I think I know interest rates much better than they do, and I think I know them certainly much better than the one who’s primarily in charge of making that decision,” Trump said last week, suggesting rates should come down “a lot”.
But officials on the Federal Open Market Committee (FOMC), the body responsible for setting rates, said there was a strong case for keeping rates on hold.
“Recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilised at a low level in recent months, and labour market conditions remain solid. Inflation remains somewhat elevated,” it said in a statement.
Indeed, rate-setters removed a previous reference to inflation making “progress” from the policy statement, suggesting they are more worried about the persistence of price pressures.
Inflationary pressures remain elevated. The Fed’s preferred measure of price pressures, the core PCE index, stands at 2.8 per cent. New figures will be released on Friday.
Many economists are also concerned that Trump’s policies could reinforce inflationary pressures.
The widespread imposition of tariffs, for example, would force up costs for businesses. The President’s tax cuts would also add to demand while mass deportations would weigh on supply.
The economy, meanwhile, remains strong. Figures out tomorrow are expected to show that the world’s largest economy grew at annualised rate of 2.9 per cent in the final quarter of 2024.
The latest forecasts from the International Monetary Fund (IMF) suggest it will grow 1.9 per cent this year, faster than any other G7 economy.
The continued strength of the economy means rate-setters are able to pause cutting rates while they assess how Trump’s policies will impact the economy before making further moves.
Traders anticipate just one rate cut this year and some investors have even suggested that rate-setters might be forced to lift rates again.
The Fed said that the risks to achieving its inflation and employment goals were “roughly in balance”.