Federal Reserve holds US interest rates despite Trump pressure, but divisions emerge

Powell offers hawkish sentiment as traders pare back expectations of September rate cut

US Federal Reserve Chair Jerome Powell has said the full effect of tariffs on economic activity are not yet clear. Reuters

A divided Federal Reserve held US interest rates steady on Wednesday, despite an increasing pressure campaign by President Donald Trump to lower borrowing costs.

The Fed's target range remained set at 4.25 to 4.50 per cent following the central bank's decision to extend its rate-cut pause for a fifth consecutive month.

The UAE Central Bank, which follows Fed decisions because of the dollar peg, also maintained its base rate for the overnight deposit facility at 4.4 per cent following the US central bank's announcement.

It also decided to maintain the interest rate applicable to borrowing short-term liquidity from the CBUAE at 50 basis points above the base rate for all standing credit facilities.

Fed governors Christopher Waller and Michelle Bowman – both appointed by Mr Trump – dissented, arguing the central bank should have lowered the federal funds target rate by 25 basis points. It was the first time in more than two decades that two Fed governors had dissented on a policy decision. Governor Adriana Kugler was absent and did not vote.

The dissents reflect a growing division inside the central bank over interest rates as pressure builds on Fed Chair Jerome Powell, who has faced repeated attacks from Mr Trump to lower rates. The latest developments also come amid growing speculation over who will lead the central bank once Mr Powell’s term expires next year.

Trump pressure

Earlier on Wednesday, Mr Trump seized on a better-than-expected GDP report to demand lower interest rates.

“2Q GDP JUST OUT: 3%, WAY BETTER THAN EXPECTED! 'Too Late' MUST NOW LOWER THE RATE. No inflation! Let people buy, and refinance, their homes,” he wrote on the Truth Social media platform.

Mr Trump has suggested the Fed lower interest rates by three percentage points to help reduce borrowing costs on the US national debt as well as shore up the housing market.

“We don't consider the fiscal needs. No advanced-economy central bank does that, and it wouldn't be good for if we did do that,” Mr Powell said at a news conference.

Trump and Powell publicly bicker over Federal Reserve building renovation figures

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Mr Trump escalated his pressure campaign by touring the Fed’s headquarters last week, criticising Mr Powell for the costs associated with the project. The two men publicly bickered at the renovation site, but Mr Powell offered a more conciliatory tone on Wednesday.

“I was quite pleased to have the President say multiple times that what he really wanted to see was us getting this construction completed as soon as possible. That is our focus,” Mr Powell said.

So far, Mr Trump’s attacks have done little to persuade Mr Powell to move. The Fed has adopted a wait-and-see approach towards cutting rates this year, owing to uncertainty over the economic effects of Mr Trump’s tariff policies.

“Higher tariffs have begun to show more clearly the prices of some goods, but their overall effects on economic activity and inflation are being unseen,” Mr Powell said.

And even Fed members who have called for rate cuts have suggested doing so at a far more moderate pace than what Mr Trump wants.

Fed division

Driving the dissent among the rate-setting Federal Open Market Committee was which side of the central bank’s dual mandate to prioritise: price stability or maximum employment.

Mr Waller and Ms Bowman both signalled in the weeks leading up to the latest meeting that they believed it was appropriate to cut interest rates this month before the labour market weakens further.

Recent data showed the labour market as being in stasis, with both hiring and quitting rates near historic lows, even as the unemployment rate remains stable at 4.1 per cent.

However, Mr Powell said the Fed was further away from its price stability mandate than its maximum employment mandate.

Economists generally argue that tariffs will lead to higher inflation and recent data showed that businesses are beginning to pass costs of some everyday items, such as household appliances, to consumers. But Mr Powell said it was unlikely that this would lead to persistent inflation.

“A pretty reasonable base case is that this will be a one-time price increase, and in the end, we'll make sure that that's the case,” he said. “We're just trying to do that efficiently.”

Fed officials have previously suggested there could come a point when their two mandates could clash. Cutting rates too soon could reverse course on the downwards trend inflation seen since its 2022 peak, while holding rates for too long could lead to unnecessary damage in the housing market.

Fed officials were expected to receive more information this week, including inflation and unemployment data from June on Thursday and Friday, respectively.

Powell non-committal on cut

Mr Powell offered a more hawkish perspective on policy decisions, firmly siding with the central bank's price stability mandate.

“When we have risks to both goals, and one of them is farther away from goal than the other, and that's inflation, that means policy should be tight, because tight policy is what brings inflation down,” he said.

Mr Powell did not give any indication which way the Fed was leaning ahead of its September meeting. “He doesn't want to have to backtrack … if he gets too stimulative too quickly, and so it's a very well telegraphed, orchestrated slow process so that once he does start to ease, it doesn't need to be reversed,” said Arnim Holzer, Global Macro Strategist at Easterly EAB.

Traders pared back expectations of the Fed resuming its interest rate cuts in September from roughly 63 per cent yesterday to about 54 per cent on Wednesday, according to CME Group data.

The Dow Jones Industrial Average fell 171 points – or 0.38 per cent – while the S&P 500 also closed lower, dropping 0.12 per cent. The Nasdaq Composite climbed 0.15 per cent. “It was a slightly bearish result,” Mr Holzer said.

Fed officials are due to receive two rounds of unemployment and inflation data before they meet next month. Meanwhile, officials are also likely to continue tracking how Mr Trump's negotiations with major trading partners evolve.

The White House recently announced a 15 per cent tariff on the European Union, while discussions continue with China. Meanwhile, Mr Trump has announced a range of tariffs on Mexico and Canada.

“For the Fed to take their time here makes sense because we don't know the rules of the road unless and until we get the answers on Canada and Mexico,” said Art Hogan, chief market strategist at B Riley Wealth.