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Fed Reserve Likely to Keep Rates Steady05/05 06:02
The Federal Reserve will likely keep its key short-term interest rate
unchanged on Wednesday, despite weeks of harsh criticism and demands from
President Donald Trump that the Fed reduce borrowing costs.
WASHINGTON (AP) -- The Federal Reserve will likely keep its key short-term
interest rate unchanged on Wednesday, despite weeks of harsh criticism and
demands from President Donald Trump that the Fed reduce borrowing costs.
After causing a sharp drop in financial markets two weeks ago by saying he
could fire Fed Chair Jerome Powell, Trump subsequently backed off and said he
had no intention of doing so. Still, he and Treasury Secretary Scott Bessent
have said the Fed should cut rates.
They argue that inflation has steadily cooled and high borrowing costs are
no longer needed to restrain price increases. The Fed sharply ramped up its
short-term rate in 2022 and 2023 as pandemic-era inflation spiked.
Separately, Elon Musk, the head of Trump's Department of Government
Efficiency, last Wednesday suggested that DOGE should look more closely at the
Fed's spending on its facilities.
The heightened scrutiny shows that even as the Trump administration backs
off its threats to fire Powell, the Fed is still subject to unusually sharp
political pressures, despite its status as an independent agency.
Even so, the Fed will almost certainly leave its key rate unchanged at about
4.3% when it meets Tuesday and Wednesday. Powell and many of the other 18
officials that sit on the Fed's rate-setting committee have said they want to
see how Trump's tariffs affect the economy before making any moves.
Trump, however, on Friday said on the social media platform Truth Social
that there is "NO INFLATION" and claimed that grocery and egg prices have
fallen, and that gas has dropped to $1.98 a gallon.
That's not entirely true: Grocery prices have jumped 0.5% in two of the past
three months and are up 2.4% from a year ago. Gas and oil prices have declined
-- gas costs are down 10% from a year ago -- continuing a longer-running trend
that has continued in part because of fears the economy will weaken. Still, AAA
says gas prices nationwide average $3.18 a gallon.
Inflation did drop noticeably in March, an encouraging sign, though in the
first three months of the year it was 3.6%, according to the Fed's preferred
gauge, well above its 2% target.
Without tariffs, economists say it's possible the Fed would soon reduce its
benchmark rate, because it is currently at a level intended to slow borrowing
and spending and cool inflation. Yet the Fed can't now cut rates with Trump's
broad tariffs likely to raise prices in the coming months.
Vincent Reinhart, chief economist at BNY, said that the Fed is "scarred" by
what happened in 2021, when prices rose amid supply snarls and Powell and other
Fed officials said the increase would likely be "transitory." Instead,
inflation soared to a peak of 9.1% in June 2022.
This time they will be more cautious, he said.
"That's a Fed that is going to have to wait for evidence and be slow to
adjust on that evidence," Reinhart said.
Plus, Trump's badgering of Powell makes it harder for the Fed chair to cut
rates because doing so anytime soon would be seen as knuckling under to the
White House, said Preston Mui, an economist at Employ America.
"You could imagine a world where there isn't pressure from the Trump
administration and they cut rates ... sooner, because they feel comfortable
making the argument that they're doing so because of the data," he said.
For his part, Powell said last month that tariffs would likely push up
inflation and slow the economy, a tricky combination for the Fed. The central
bank would typically raise rates -- or at least keep them elevated -- to fight
inflation, while it would cut them to spur the economy if unemployment rose.
Powell has said that the impact of the tariffs on inflation could be
temporary -- a one-time price increase -- but most recently said it "could also
be more persistent." That suggests that Powell will want to wait, potentially
for months, to ensure tariffs don't sustainably raise inflation before
considering a rate cut.
Some economists forecast the Fed won't cut rates until its September
meeting, or even later.
Yet Fed officials could move sooner if the tariffs hit the economy hard
enough to cause layoffs and push up unemployment. Wall Street investors appear
to expect such an outcome -- they project that the first cut will occur in
July, according to futures pricing.
Separately, Musk criticized the Fed Wednesday for spending $2.5 billion on
an extensive renovation of two of its buildings in Washington, D.C.
"Since at the end of the day, this is all taxpayer money, we should
certainly look to see if indeed the Federal Reserve is spending $2.5 billion on
their interior designer," Musk said. "That's an eyebrow raiser."
Fed officials acknowledge that the cost of the renovations have risen as
prices for building materials and labor have spiked amid the post-pandemic
inflation. And former Fed officials, speaking on background, say that local
regulations forced the Fed to do more of the expansion underground, rather than
making the buildings taller, which added to the cost.
Meanwhile, Kevin Warsh, a former Fed governor and a potential candidate to
replace Powell as chair when Powell's term expires next year, said recently
that the Fed has attracted greater scrutiny because of its failure to keep
prices in check.
"The Fed's current wounds are largely self-inflicted," he said in a speech
during an International Monetary Fund conference in late April, in which he
also slammed the Fed for participating in a global forum on climate change. "A
strategic reset is necessary to mitigate losses of credibility, changes in
standing, and most important, worse economic outcomes for our fellow citizens."
Powell, for his part, said last month that "Fed independence is very widely
understood and supported in Washington, in Congress, where it really matters."
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