– Governors Waller, Bowman Preferred Immediate 25 Basis Point Rate Cut
– Powell: ‘More Neutral’ Policy May Be Justified If ‘Downside Risks’ To Jobs Increase
– Powell: For Now ‘Moderately Restrictive’ Stance Leaves Fed ‘Well-Positioned’
By Steven K. Beckner
(MaceNews) – Once again, Federal Reserve policymakers refused to lower short-term interest rates Wednesday in the face of intensifying White House pressure to do so.
Fed Chair Jerome Powell allowed for the possibility of monetary easing in coming months, depending on how inflation and labor market developments unfold, but for now the Fed’s rate-setting Federal Open Market Committee voted to leave the federal funds rate in a target range of 4.25% to 4.5% for a fifth straight meeting after lowering that key policy rate by 100 basis points over the last three meetings of 2024.
Powell did not clearly lean toward a rate cut when the FOMC meets again Sept. 16-17, noting that he and his fellow policymakers will have two full sets of inflation and employment data to consider before that meeting.
He did say in his post-FOMC press conference that the most likely “base case” is that higher tariffs will not have persistent or far-reaching effects on inflation and that rising “downside risks” to employment will have to be weighed.
Were risks to the Fed’s 2% inflation goal and its goal of “maximum employment” to come into more balance, it would be appropriate for monetary policy to move toward a “more neutral” stance, Powell said.
But for now, he said, the FOMC majority believes that keeping a “modestly restrictive” policy stance leaves the Fed “well-positioned” to respond.
The unusually high uncertainty surrounding Trump tariffs and other policies which had alarmed the Fed and kept it on hold all year would seem to have dissipated somewhat with the recent announcement of major trade deals with the UK, Japan, the EU, among others, and with enactment of far-reaching fiscal legislation.
Nevertheless, Powell continued to emphasize that much uncertainty remains about the extent and duration of tariff impacts on inflation and the economy.
Though defiant, the FOMC was divided, as two members of the Fed board of governors — Michelle Bowman and Christopher Waller — dissented in favor of an immediate 25 basis point rate cut. It was the first time since December 1993 that two governors dissented from an FOMC decision.
Almost up to the moment of FOMC decision time, President Trump continued to demand lower interest rates. After the Commerce Department reported stronger than expected 3% second quarter GDP growth, the President posted, “’’Too Late’ (Powell) MUST NOW LOWER THE RATE. No Inflation! Let people buy, and refinance, their homes.”
(The counterargument from many Fed officials would be that strong growth proves monetary policy is not overly restrictive and that the economy does not need easing at a time when inflation is still running above target. )
Indeed, as if to rebuke Trump, Powell observed, “the economy is not performing as a restrictive policy we are holding it back inappropriately. So, it seems to me and to almost the whole committee that the economy is not performing as a restrictive policy is holding it back inappropriately and modestly restrictive policy seems appropriate.”
The FOMC decided to continue shrinking its balance sheet – a form of “quantitative tightening.”
There were few significant changes in the FOMC’s policy statement, although it did change its assessment of “uncertainty about the economic outlook.” It now says uncertainty “remains elevated.” By contrast, in the June 18 statement, it said uncertainty had “diminished.” Powell made light of the wording change.
Also, the new statement mentions that “recent indicators suggest that growth of economic activity moderated in the first half of the year.” By contrast, in its June 18 statement, the Committee had said “recent indicators suggest that economic activity has continued to expand at a solid pace.”
This downward assessment of economic growth came despite the fact that earlier Wednesday, the Commerce Department reported a surprise pick-up in GDP growth in second quarter GDP to 3%, following a first quarter dip. The statement continued to call labor market conditions “solid” and inflation “elevated” relative to the Fed’s 2% target.
Although the FOMC stayed on hold for now, many were hoping that its policy statement and Powell’s comments might hint that the Fed will resume cutting rates at its Sept. 16-17 meeting. But that was not really forthcoming as Powell refused to give any forward guidance on the next meeting.
Instead, he spoke in terms of contingencies, based on how incoming data illuminate the “balance of risks” between the Fed’s dual mandate goals. His repeated emphasis was that above-target inflation has to remain the Fed’s primary concern at a time when employment is “at target” with the unemployment rate at 4.1%.
“A reasonable base case is that the effects (of tariffs) on inflation could be short lived, reflecting a one-time shift in the price level,” Powell said. “But it is also possible that the inflationary effects could instead be more persistent, and that is a risk to be assessed and managed.”
“Our obligation is to keep longer-term inflation expectations well anchored and to prevent a one-time increase in the price level from becoming an ongoing inflation problem,” the Fed chief continued. “For the time being, we are well positioned to learn more about the likely course of the economy and the evolving balance of risks before adjusting our policy stance.”
Powell acknowledged some signs of cooling in the labor market and said “downside risks to the labor market are certainly apparent.”
He said the unemployment rate has stayed low at 4.1% reflects a weakening of both labor demand and labor supply, but that this “is suggestive of downside risk so we, of course, will be watching that carefully.”
However, without saying the Fed needs to be “in no hurry” to cut rates, as he had done on many previous occasions. Powell gave no indication he feels the need to act at the next meeting. He said there are risks to moving either too soon or too late.
The FOMC wants to lower inflation “efficiently,” he said, meaning “we want to do it …. if you move too soon, you wind up maybe not getting inflation all the way fixed and you have to come back. That’s inefficient. If you move too late you might do unnecessary damage to the labor market.”
So, he said no decisions have been made about the September meeting after noting that the Fed will be getting two months worth of employment and price data between now and then.
Powell professed not to be disturbed by the unusual pair of dissents, saying he welcomes the discussion around the FOMC table and the different cases made by FOMC participants. Nevertheless, Powell faces an unusual amount of opposition to his wait-and-see policy approach.
Waller was quite blunt about his policy preferences in a July 17 speech to the Money Marketeers of New York University, declaring, “Taken together, the data imply the policy rate should be around neutral, which the median of FOMC participants estimates is 3%, and not where we are—1.25 to 1.50 percentage points above 3 percent.”
Given “the distance that must be traveled to reach a neutral policy setting,” he argued, “it makes sense to cut the FOMC’s policy rate by 25 basis points two weeks from now (July 30).”
“And looking to later this year, if, as I expect, underlying inflation remains in check—with headline inflation data reporting modest, temporary increases from tariffs that are not unanchoring inflation expectations—and the economy continues to grow slowly, I would support further 25 basis point cuts to move monetary policy toward neutral,” Waller added.
But as for the FOMC majority, Powell said “the view that inflation is a bit above target, maximum employment is at target. That calls for a modestly restrictive, in my way of thinking, modestly restrictive stance right now.”
Powell said views vary among policymakers about where the “neutral” rate is, but all agree that the funds rate is above neutral, and he made clear that eventually the FOMC will want to move toward a greater degree of neutrality.
“At some point when we return to moving toward a more neutral stance we will be making that judgment as we go,” he said. “We don’t have a preset course. It’s not so mechanical as saying we have derived with great confidence the neutral rate and that is our destination.”
“Nobody knows what the neutral rate is,” he continued. “We know it works. How the economy will react over time to slightly looser policy.”
Powell left no doubt that rates are eventually headed lower; he just gave little sense of timing.
Asked whether, to cut rates, the Fed needs to see inflation back nearly to target or whether it needs to see weakening in the job market, he responded, “I mean ultimately it’s — it could be any of those things, right?”
“But, you know, if you saw that the risks to the two goals were moving into balance, if they were fully in balance, that would imply that you should move toward a more neutral stance on policy,” he continued.
“This is the special situation we are in, which is we have two-sided risks, risks to both of our goals,” Powell went on. “When we paused, inflation was above target and the labor market was pretty good …..”
“As the two targets get back into balance, you would think you would move it in a way closer to neutral and the next steps that we take are likely to be in that direction,” he added.
But Powell refused to be specific about “what will it take” to cut rates. “You know, it will just — it will be the totality of the evidence.”
One possible key, he said, is “maybe … evidence that the tariff effect is going to be a temporary one-time thing.”
“We will look at everything,” Powell elaborated. “You know, .… a pretty reasonable base case is that this will be a one-time price increase. And in the end, we will make sure that that’s the case. We are just trying to do that efficiently, and efficiently means getting the timing right.”
Powell repeated that “if we cut rates too soon, maybe we didn’t finish the job with inflation,…” but “if you cut too late, then maybe you are doing unnecessary damage to the labor market. So, we are trying to get that timing right. And that’s effectively what we are doing.”
As he has since April, when Trump announced his “Liberation Day” tariff campaign, the Fed chair continued to emphasize uncertainties about the impact of tariffs and other Trump policies.
“Changes to government policies continue to evolve, and their effects on the economy remain uncertain,” he said. “Higher tariffs have begun to show through more clearly to prices of some goods, but their overall effects on economic activity and inflation remain to be seen.”
The FOMC did not revise its Summary of Economic Projections at this meeting. As part of the SEP published at its June 17-18, 19 FOMC participants projected that by year’s end, the funds rate will be at a median 3.9% (a target range of 3.75% to 4.0%), implying two 25 basis point rate cuts sometime during the remainder of 2025. A new SEP cum “dot plot” is scheduled for Sept. 17.
The Committee seems divided into various camps. While a two officials have supported near-term easing, and others have backed cutting rates at least two times this year, others favor fewer cuts, and a substantial bloc of officials foresee no easing this year.
The apparent strength of the economy and its labor markets have made it difficult to justify cutting rates when inflation is still running close to 3% by key measures and when tariff increases and other policy changes continue to flash warning signals of uncertainty; about the outlook. As former New York Fed President Gerald Corrigan once said, “the amber light is on.”
Ironically, the more President Trump has demanded rate cuts, the more intransigent some policymakers have become in protection of the independent central bank’s credibility.
For months President Trump has been urging Powell to slash the funds rate by up to 300 basis points — at times insulting him, at times threatening to fire him on the grounds that he has indulged huge cost overruns on renovation of the Fed’s Washington headquarters. But as such rhetoric began to unsettle financial markets, the Trump administration has backed off somewhat.
Most recently, Treasury Secretary Scott Bessent, while calling for a review of the “entire” Federal Reserve, said there is no need for Powell to leave his post before his term as chair expires next May. Subsequently, Trump followed the former hedge fund manager’s lead by saying, in reference to the eight months remaining in Powell’s term, that “he’s going to be out pretty soon.”
But, with an eye toward lowering the Treasury’s debt financing costs, the president has continued to make demands for lowers rates and to throw insults, calling Powell “a numbskull” one day last week.
Powell got a personal visit from Trump last Thursday, when the two men toured the Fed’s Constitution Avenue construction site in hard hats. Once again, Trump needled a visibly uncomfortable Powell about rate cuts while accusing him implicitly of mismanaging the Fed renovation.
House Republican leaders have also gotten into the act. Rep. Anna Paulina Luna, R-Fla. has accused Powell of perjury in congressional testimony and has referred him to the Justice Department for criminal charges.