Original Title: "What if there are two votes against? The Federal Reserve still does not cut interest rates"
Original Source: Jin10 Data
At 02:00 Beijing time on Thursday, the Federal Reserve maintained its interest rates for the fifth time, keeping the target range for the benchmark interest rate at 4.25%-4.50%, in line with market expectations. This decision by the Federal Reserve was made against the backdrop of strong political pressure from the White House on Chairman Powell to cut interest rates.
The Federal Reserve kept its benchmark policy rate in the range of 4.25% to 4.5%, while weighing how importers, retailers, and consumers would share the costs brought about by higher tariffs. The outcome of the intense debate over who will bear the burden of tariffs may determine the direction of inflation and employment later this year and could influence whether and when the central bank resumes interest rate cuts in the coming months.
The Federal Reserve made almost no changes in its policy statement, indicating that it currently has no intention of signaling any upcoming interest rate cuts.
The decision to maintain interest rates was met with rare opposition from two officials, with Federal Reserve governors Waller and Bowman calling for an immediate 25 basis point cut. This marks the first time since 2020 that more than one Federal Reserve official has voted against Powell's decision in a meeting, and it is the first time since 1993 that two board members have held differing opinions.
Federal Reserve Governor Waller expressed support for a rate cut two weeks ago, aligning with his potential nomination to succeed Powell as Federal Reserve Chairman next spring. Earlier this month, he voiced concerns that maintaining excessively high rates is too much for an economy lacking inflationary pressures—a view supported by some economists and former Federal Reserve officials.
Governor Bowman, who has previously been a staunch representative of hawkish positions and opposed the first rate cut that began last September, has made a notable shift in her stance.
Powell and his colleagues are examining how tariffs are reflected in inflation data, with markets generally worried that rising commodity prices could push inflation above the Federal Reserve's 2% target for the fifth consecutive year. Although inflation has significantly retreated from its peak between 2021 and 2023, and no recession has occurred as many economists predicted, Federal Reserve officials remain highly vigilant against prematurely cutting rates and reigniting price pressures.
Many businesses have stockpiled inventory before tariffs take effect, and due to concerns about losing consumers overwhelmed by inflation, they have been reluctant to raise prices. However, some economists warn that as lower-margin businesses deplete their pre-tariff inventories and face higher costs, they may increasingly be inclined to pass these costs onto consumers.
Richard Clarida, who previously served as Powell's deputy and was appointed by Trump, stated:
Powell has too many things to juggle right now, but one thing he has indeed said, and his critics have not fully recognized, is that tariffs are already reflected in some price indices. The reason inflation pressures have not spiraled out of control is that service prices have remained stable.
Economic data released earlier on Wednesday sent mixed signals, explaining the Federal Reserve's cautious stance. Although GDP growth in the second quarter reached 3.0%, exceeding expectations, measures of private enterprise and consumer demand slowed from 1.9% in the previous quarter to 1.2%, far below the 2.9% at the end of last year.
Economists attribute this decline to slowing labor growth and the impact of tariffs. Other recent data suggest that consumer spending may have stabilized before rising import costs are reflected in retail prices.
However, the Trump administration believes that in the long run, tariffs will make the U.S. wealthier by driving high-paying manufacturing jobs.
In understanding the Trump administration's economic policies, the Federal Reserve has fallen into a "two steps forward, one step back" cycle. The tariff levels set by recent trade agreements between the U.S. and Japan and the EU are at 15%, lower than Trump's threatening rhetoric in April of this year, but still higher than market expectations at the beginning of the year. Trump's unpredictability also leaves the possibility of future tariff increases, along with the risk of judicial challenges that could overturn these tariffs.
On the fiscal front, Trump signed a significant tax cut bill this month. Some Republican lawmakers are discussing rebates to consumers, which could provide new stimulus to an economy that the Federal Reserve believes is close to full employment. If the labor market remains stable as a result, Federal Reserve officials may regret cutting rates too early.
Investors currently expect about a two-thirds probability that the Federal Reserve will cut rates at the September meeting, but this depends on whether the impact of tariffs on inflation remains controlled and whether there are more signs of weakness in the labor market.
In the coming months, divisions within the Federal Reserve may focus on the following questions: whether the speed at which tariffs damage the economy will exceed the speed at which they push up inflation, and whether acting rashly before the situation is clear could lead to policy misjudgments.
One viewpoint holds that current interest rates are above the range suitable for the actual economic situation, and that there is insufficient fundamental pressure on inflation; if employment growth stagnates, the Federal Reserve will validate criticisms from the White House and others that they are "behind the curve."
However, another viewpoint worries that cutting rates amid rising price pressures from summer tariffs, or under the dual impetus of fiscal stimulus and active financial markets, could bring unexpected overheating to the economy, making a rate cut potentially premature.
If data shows a clear direction before September, decision-making may become relatively straightforward: if inflation is stubborn and economic growth is strong, a rate cut can be delayed; if the economy shows clear signs of weakness, there would be justification for lowering rates. But if the current state of ambiguity continues, Powell will have to face more difficult choices.
Richard Clarida stated:
If the data continues to evolve at the current pace, it will become very tricky—neither enough to warrant a clear rate cut nor good enough to declare victory. Therefore, a more likely scenario than some might imagine is that Powell simply holds steady, keeping rates unchanged in all six of his remaining policy meetings.
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