The Federal Reserve has decided to keep its short-term interest rates steady at 4.25% to 4.5%, but this time there was notable dissent among committee members for the first time in over three decades.
Nine members of the Federal Open Market Committee (FOMC) voted to maintain the current rates.
However, two members, Michelle Bowman and Christopher Waller, pushed for a reduction amidst significant pressure from the president.
This marked the first occurrence of dual opposition among committee members in a long time, as the FOMC has typically voted unanimously for more than 30 years. It’s worth noting that the FOMC consists of all Fed Committee members, including rotating officials from regional reserve banks.
The decision to hold rates steady aligns with market expectations, keeping rates unchanged since January. Prior to the decision, futures markets indicated a 96.9% likelihood that rates would remain the same.
This decision comes at a time when prices are beginning to rise again—possibly due to tariffs from President Trump’s trade policies.
The Consumer Price Index (CPI) saw a year-over-year increase of 2.7% in June, up from 2.4% in May. Similarly, the Personal Consumption Expenditure (PCE) index rose from 2.2% in April to 2.3% in May.
Economists suggest that businesses are passing on the increased costs from tariffs, most notably in sectors like electronics, home furnishings, and clothing, all of which are particularly sensitive to import taxes.
Despite the impact of tariffs, inflation remains a concern. Powell mentioned earlier this month in Portugal that the central bank might have considered rate cuts even without Trump’s tariffs, highlighting their significant influence on the Fed’s decisions.
The employment report for June was also strong, revealing that the economy added a seasonally adjusted 147,000 jobs, with the unemployment rate holding steady at 4.1%. However, the pressure on prices doesn’t seem directly linked to the administration’s trade policies.
“Inflation is certainly more controlled compared to the immediate post-pandemic period, yet it has hovered between 2.3% and 3.0% since last June, clearly above the Fed’s target of 2.0%,” commented Jerry Tempelman, a former analyst with the New York Fed.
Tempelman also noted that job growth has been markedly stronger than the previous summer, suggesting that policy shifts may be necessary three times in 2024.
Both Bowman and Waller were advocating for rate cuts before this week’s meeting.
Waller argued in favor of reductions based on sluggish growth, pointing to a labor market that seems to be nearing stagnation.
“While the labor market appears healthy at first glance, upcoming data revisions might reveal that private sector job growth is close to stalling. Other indicators suggest challenges ahead,” he remarked earlier this month.
Although he acknowledged that tariffs contribute to inflation, the ongoing hold on rates comes amidst significant expectations for low interest rates from Trump.
In a notable moment, Trump confronted Powell during a joint appearance last week about the rising renovation costs associated with the Fed’s facility. Trump claimed that the overruns had been higher than previously reported, presenting documents as evidence. Powell dismissed the documents, stating they included estimates for projects already completed.
The rate pause follows a robust report from the Commerce Department regarding second-quarter economic growth.
The report indicated that GDP grew by 3% after a modest increase of 0.5% in the first quarter.
This substantial rise is mainly attributed to a drop in imports, reflecting the disruption in trade flows resulting from the trade war.
Some economists have labeled this growth a “mirage,” given that they expect the headline number to be misleading.
“This apparent strength is just an economic mirage driven by a sudden drop in imports after earlier tax-induced demand,” analyzed Gregory Daco, an economist at Ey-Parthenon. “If you look past the noise, the US economy expanded at a 1.2% rate, consistent with the average pace from the first half of the year, indicating weak underlying private sector demand.”
