Fed holds rates amid pressure from White House

The US Federal Open Market Committee (FOMC) has maintained its interest rates target at 4.25–4.5%, despite pressure from president Donald Trump to ease policy.

On January 23, Trump had said he would “demand that interest rates drop immediately. And likewise, they should be dropping all over the world”.

The president has also repeatedly promised to impose tariffs on the US’s largest trading partners – a move that economists say could have a significant negative impact on domestic prices and levels employment.

During a press conference following the decision today (January 29), chair of the Federal Reserve Jerome Powell said it would not be “appropriate” for him to comment on what Trump had said. He added that he had had no contact with the president since the latter’s remarks on January 23.

Powell said the Fed’s policy stance was well calibrated. He said the FOMC expected to see further progress on inflation and that if this happened or if the labour market weakened, it would be in a position to make adjustments. “We don’t need to be in a hurry to make any adjustments,” he said

He added that the FOMC was waiting for policies to be enacted and that it did not know which ones would come into force in relation to tariffs, immigration, fiscal matters and regulation.

Reaction from analysts

Alan Blinder, a former vice-chair of the Fed, says Powell’s main goal is, or should be, to keep the central bank’s options open. “At this point, no one – including Powell – knows what the Fed will want to do in March,” he tells Central Banking.

Asked how much of a bearing issues such as tariffs should have on the Fed’s decisions, Blinder says they “are always of the essence”.

[A Federal Reserve rate] decision will – as it should – depend on the needs of the economy and the objectives specified by Congress, not the dictates of short-run politics

Benjamin Friedman, Harvard University

However, he adds that Trump has made tariffs “so political that Powell will want to tread lightly there. Tariffs are modestly inflationary, and so will make the Fed’s disinflationary job harder”.

William English, professor of financial stability at Yale University and a former director of the Federal Reserve Board’s monetary affairs division, spoke to Central Banking prior to the decision. He said the most interesting thing about the meeting would be the way in which the Fed communicated its decision.

“In particular, do they suggest this is just a temporary pause, with rate cuts likely in the spring, or do they suggest that they may hold at this level of rates for some time?” he said. “My guess is that they will be ambiguous on that point and try to focus instead on the economic conditions that could lead them to hold rates at current levels or cut further.”

Also speaking prior to the decision, Ralf Fendel, professor of economics at the WHU Otto Beisheim School of Management in Germany, agreed that the meeting and the subsequent communications would prove among the most challenging tasks of Powell’s tenure – “not because of deciding on the most appropriate policy rate to be set itself, but rather on how to frame and justify any possible decision”.

Benjamin Friedman, professor of economics at Harvard University, said Powell needed to make it clear that the Fed, authorised by Congress, would not become involved in day-to-day politics.

“Depending on how the US economy progresses, the Federal Reserve may at some point soon lower short-term interest rates, or it may raise them,” he said. “But that decision will – as it should – depend on the needs of the economy and the objectives specified by Congress, not the dictates of short-run politics.” 

Stephen Cecchetti, professor of international finance at Brandeis University, notes that the current economic landscape is marked by uncertainty. This, he says, “creates a certain form of caution. If you’re not sure whether there’s black ice on the road, you slow down whether it’s there or not”. Cecchetti adds that many global arrangements look as though they are being reset, and that the outcomes of this remain unknown.

Philipp Carlsson-Szlezak, global chief economist at Boston Consulting Group, says the Fed’s decision-making should not try to account for policies that have yet to materialise. “As of yet the flurry of policies has not left a material footprint on growth and inflation, meaning the Fed won’t be reacting to them in the near term,” he says.

Steven Blitz, chief US economist for forecasting consultants TS Lombard, agrees. He tells Central Banking that the Fed is well aware of the proposed tariffs, but that the only thing monetary policy-makers can do is wait.

Fendel argued that tariffs would play a role in both the decision and any surrounding communication by the Fed. He added that the central bank would exercise caution as a result.

“If Powell is brave, he could justify a pause or even a cautious cut by pointing to the upcoming inflation pressure from the tariffs and other Trump measures, and thus implicitly point to the inconsistency of the Trump policies,” he said. “I would admire him for such a courageous statement, but it could soon put him out of office – which, in turn, would be the worst-case scenario for the Fed and US price stability.”

Tariffs, says Carlsson-Szlezak, would muddy the picture as to whether inflation was durably moving towards the Fed’s target.

Tariffs and immigration controls – in an environment where the US-born population is shrinking – are likely to be somewhat inflationary

James Knightley, ING Financial Markets

James Knightley, chief international economist for ING Financial Markets, says it looks as though the Fed will be facing “a barrage of criticism from Trump unless they acquiesce [to lower rates]. But the Fed under Powell will undoubtedly exercise its independence and comply only if doing so is consistent with its mandate.”

Knightley says the Fed will need to see more data before it can decide to cut rates twice – as the FOMC has projected will happen this year.

“Their concern is likely to be that Donald Trump’s policy thrust of tax cuts and light-touch regulation should be growth-supportive,” he says. “Tariffs and immigration controls – in an environment where the US-born population is shrinking – are likely to be somewhat inflationary.” Knightley says these policies are likely to be the reason why the Fed in December lowered its projected number of rate cuts this year from four to two.

A large one-time tariff, he says, could raise price levels and be highly damaging to economic growth. He adds that the Fed might focus on the growth impact rather than the inflationary aspect, as the tariff would only have a one-off impact on prices.

He nevertheless warns: “If it is a slow, incremental ratcheting higher of tariffs, the Fed may be more worried that this is a supply shock that is likely to be more bearable economically, but could result in more permanent inflation if we see prices raised 2% every couple of months or so. They are much more likely to run tighter monetary policy in that environment.”

Fendel said today’s meeting would only be the first battle in the war over the Fed’s independence.

Blitz agrees. “Trump is not the first president to pressure the Fed – Johnson, Nixon and Reagan all did, with differing degrees of success,” he says. “Powell will do what he believes is correct and the FOMC will follow. If Trump wants to fire him, then Powell will take it to court.”