As Trump ramps up pressure, the US Fed's job becomes more challenging
In its June meeting, the US Federal Reserve kept interest rates unchanged, maintaining the target range for federal funds at 4.25-4.5 per cent. This is the fourth consecutive meeting when the Fed has refrained from lowering rates. The decision was along expected lines. The Fed has adopted a wait-and-watch approach as it gauges the impact of President Donald Trump's policies on inflation and the economy. The US central bank has now indicated the possibility of two interest rate cuts this year and another cut next year.
But there was a notable change of tone in the Fed's policy statement this time. In May, the central bank had said that 'uncertainty about the economic outlook has increased further'. The meeting was held just after Trump's 'Liberation Day' tariff announcements. In the June meeting, however, the Fed noted that 'uncertainty about the economic outlook has diminished', though it still 'remains elevated.' But the effects of tariffs on the economy, and inflation in particular, are beginning to be felt. In his comments, Fed Chairman Jerome Powell noted that in some categories, such as personal computers and audio-visual equipment, price increases were being seen, and that is 'attributable to tariff increases'. However, the full effect on consumer prices will only be visible in the weeks and months ahead once the inventories built up by retailers before the tariffs were imposed are exhausted. Powell has acknowledged that: 'We've had goods inflation just moving up a bit, and, of course, we do expect to see more of that over the course of the summer', he said. In line with this, the central bank has now raised its inflation forecast for the year to 3 per cent, up from 2.7 per cent earlier. It also expects the economic momentum to slow down — it has lowered its growth forecast to 1.4 per cent from 1.7 per cent. The labour market, though, is expected to remain broadly healthy — the Fed has projected the unemployment rate to edge only marginally upwards to 4.5 per cent, from 4.4 per cent earlier — creating the space for it to remain focused on inflation.
The Fed's policy continues to draw criticism from the US President. On Wednesday, prior to the Fed meeting, Trump is reported to have said, 'So we have a stupid person, frankly, at the Fed. He probably won't cut today. Europe had 10 cuts, and we had none. I guess he's a political guy.' In the past as well, Trump has been vocal in his criticism of Powell and the direction of the Fed's monetary policy. As Trump continues to ramp up pressure for lower interest rates, the Fed faces a challenging task as it pursues its dual mandate goals of maximum employment and price stability.
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