Federal Reserve meeting: If not now, then when?

Three things to watch out for as US central bank set to decide on interest rates

President Trump presents Jerome Powell with what Mr Trump called a list of cost overruns for the Fed’s $2.5 billion headquarters renovation. AFP

The Federal Reserve enters this week facing relentless pressure from the White House, mixed economic data and continued uncertainty. Yet, in the face of it all, the US central bank is expected to hold rates steady once more.

The meeting comes less than a week after President Donald Trump's tour of the Fed headquarters, where he and Federal Reserve Chair Jerome Powell publicly bickered over the renovation project's costs.

But with Mr Trump on holiday in Scotland, focus now shifts towards the Fed's interest rates. Mr Powell had acknowledged the bank would have cut rates by now were it not for Mr Trump's tariffs, which have put the global economy on edge since his announcement on April 2.

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The President's harsher “reciprocal tariffs” are due to take effect on Friday. Meanwhile, recent data shows that other charges are beginning to be passed on to consumers.

The Labour Department's Consumer Price Index (CPI) report showed that inflation rose to 2.7 per cent annually in June. Everyday goods such as toys, household appliances and clothing also saw price increases.

Citing uncertainty surrounding tariffs and the current inflation level above its 2 per cent target, most Fed officials are signalling they will keep their target range level for a fifth consecutive meeting at 4.25 to 4.50 per cent.

The UAE Central Bank, which mirrors Fed decisions due to the dollar peg, would also be expected to hold rates at 4.4 per cent following the US central bank's announcement.

Trump and Powell publicly bicker over Federal Reserve building renovation figures

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Path forward

According to the Fed's projections from June, it still expects to cut rates twice this year to bring its target level to around 3.9 per cent. But with the central bank likely to hold interest rates at this meeting and only three left on the calendar this year, the window to cut is closing.

“We're simply taking some time,” Mr Powell said during a panel discussion in Portugal at the start of July.

Mr Powell has practised extreme caution towards cutting rates this year, afraid that moving too soon or too quickly could lead to a renewed spike in prices not long after the most recent inflationary surge, with CPI inflation peaking at 9.1 per cent in 2022.

“When you get through an inflation episode like that, by the skin of their teeth, they're going to be really careful about anything that looks inflationary from now on,” said Derek Tang, an economist at LHMeyer/Monetary Policy Analytics in Washington.

Traders anticipate the Fed will resume cutting rates in September, before reductions in October and December, according to CME Group data.

A deluge of economic data this week should also give Fed officials greater clarity on the direction of the economy.

When you get through an inflation episode like that, by the skin of their teeth, they're going to be really careful about anything that looks inflationary from now on

Derek Tang,
economist at LHMeyer / Monetary Policy Analytics

The Labour Department will provide fresh insight into the health of the labour market with the Job Openings and Labour Turnover Survey on Tuesday and the June unemployment report on Friday.

The government will also report on second-quarter GDP hours before the Fed rate announcement. US economic activity contracted by 0.5 per cent in the first quarter, but economists note that was due to a surge of imports as business rushed to get ahead of tariffs.

The Fed's preferred inflation metric – Personal Consumption Expenditures Price Index – for June is also due to be released on Thursday.

Fed divisions

Not everyone might be on board with the committee's decision this time. Public remarks indicate a growing division inside the rate-setting Federal Open Market Committee.

Fed Governor Christopher Waller, who holds a permanent vote on the rate-setting committee, laid out his case for a quarter-point cut earlier this month. Speaking in New York, he said the Fed should not wait for further weakening in the labour market to act.

“With inflation near target and the upside risks to inflation limited, we should not wait until the labour market deteriorates before we cut the policy rate,” he said.

US job growth was more solid than expected in June, although most of those gains occurred in the government sector. At the same time, the unemployment rate has remained steady around 4.1 per cent.

Federal Reserve Chair Jerome Powell is facing increasing pressure from President Donald Trump to cut US interest rates. Reuters

Dissents among FOMC members are rare. Under Mr Powell's stewardship, only 3 per cent of dissents have come from a Fed governor.

“I'm sure it'll get a lot of attention,” said David Wilcox, senior fellow at the Peterson Institute for International Economics and director of US economic research at Bloomberg Economics.

However, he argued such disagreements could guard against groupthink.

Fed Vice Chair for Supervision Michelle Bowman could join Mr Waller's dissent after she voiced her own support for a rate cut this month.

It would be the first time two Fed governors dissented on a rate move since 2002, when Alan Greenspan was in charge of the central bank.

Mr Wilcox, a former staff member of the Federal Reserve Board, expects Mr Powell to acknowledge there could be a case to cut rates this week but that a majority of officials favour holding them steady.

“And he'll lay out the rationale for why that is,” he said.

What will Trump say?

Looming against this backdrop is Mr Trump, who softened his stance on Mr Powell last week after touring the Fed's headquarters.

Those attacks have ranged from calling the Fed Chair a “numbskull” to at times publicly considering whether he should fire him. But last week's tour offered some relief for Mr Powell after Mr Trump said he did not think the unprecedented move is necessary.

“I think we had a very good meeting on interest rates. And [Mr Powell] said to me … very strongly, the country is doing well,” Mr Trump told reporters after touring the Fed.

“I got that to mean that I think he’s going to start recommending lower rates.”

Mr Powell has sometimes cited the economy's strength as a reason not to move on rates.

The President's holiday in Scotland could give the Federal Reserve some breathing room for now, although Mr Trump has proven he can dictate the news cycle and gyrate financial markets with a push of a button.