WASHINGTON – A divided Federal Reserve on Wednesday voted to keep its benchmark interest rate steady, despite a barrage of criticism from President Donald Trump and dissents from two top officials.
The Federal Open Market Committee, the group that sets the overnight borrowing rate, voted 9-2 to stay on hold. The federal funds rate will continue to be set in a range between 4.25%-4.5%. The level sets what banks charge each other for overnight lending, but influences a slew of other rates across the economy.
However, the decision met opposition from Governors Michelle Bowman and Christopher Waller, both of whom have advocated for the Fed to start easing in acknowledgement that inflation is under control and the labor market could start weakening soon. This was the first time since late 1993 that multiple governors cast no votes on a rate decision.
The post-meeting statement offered only a couple changes in how the committee views economic conditions.
“Although swings in net exports continue to affect the data, recent indicators suggest that growth of economic activity moderated in the first half of the year,” the document stated. “The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated.”
At the June meeting, the committee had a more optimistic view, saying the economy “continued to expand at a solid pace.”
The Wednesday statement said uncertainty about conditions “remains elevated,” also a less upbeat assessment from June, which noted that uncertainty had “diminished but remains elevated.”
A slower economy would boost the argument for lower interest rates, though the committee stopped short of endorsing that view.
‘No decisions about September’
Markets had overwhelmingly expected no action on rates, but stocks headed lower after Fed Chair Jerome Powell said at a news conference that the committee hadn’t yet determined whether it would cut rates at its September meeting.
“We have made no decisions about September,” he said. “We don’t do that in advance. We’ll be taking that information into consideration and all the other information we get as we make our decision.”
He further explained that the central bank is watching the potential impact of tariffs on inflation.
“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,” he said.
Traders had been expecting the Fed to cut in September, but after Powell’s comments, the likelihood of a quarter percentage point reduction slipped to 46% from 64%, according to the CME FedWatch tool. In June, Fed officials narrowly indicated they see two cuts in total this year. The committee normally has 12 voters but was without Governor Adriana Kugler at the July meeting.
“It is an exceedingly rare occurrence when two Fed governors dissent at an FOMC meeting, but it was the most well telegraphed dissention ever at today’s FOMC meeting,” said Jack McIntyre, portfolio manager at Brandywine Global. “The driver of the dissension was about the timing of rate cuts, not the direction of policy adjustments. Not a big deal. The real impact of the dissenters was to pull Powell toward the dovish camp for September.”
McIntyre said he expects the Fed will cut in September, barring any major surprises in the July and August employment reports.
The news follows a remarkable stretch for an entity with great sway over the economy but one that has mostly avoided the political fray, at least overtly.
Trump’s push for rate cuts
Trump has called for Powell’s resignation and even toyed with the legally questionable idea of firing him. Though he’s largely backed off the threat of sacking Powell, the president has kept up the criticism of a former appointee whom he now regularly calls “Too Late.”
The president has suggested the Fed lower its benchmark rate by 3 percentage points, which he said would reduce bowering costs on the surging national debt and help the moribund housing market.
In addition to the hectoring over rates, the Trump administration has ripped Powell and the central bank for cost overruns on a massive remodeling project at two of the Fed’s buildings in Washington. Powell has insisted that the overruns are not the product of mismanagement but rather escalating costs since the project began.
Wednesday brought more news that could influence the Fed’s path, Trump’s badgering notwithstanding.
The Commerce Department reported that gross domestic product grew at a 3% annualized rate in the second quarter, considerably stronger than expected. Though much of the headline gain was propelled by a reversion of a massive import surge in the first quarter ahead of Trump’s tariffs, the report nevertheless reinforced the notion of an economy still on solid ground.
Moreover, the report showed inflation running at just a 2.1% rate for the period, according to the Fed’s main forecasting tool. Core inflation was a bit higher at 2.5%, but both numbers plunged from their first-quarter levels and neared the Fed’s 2% bogey.
“We at the White House 100% respect their independence, but we also like to respect their analysis,” National Economic Council Director Kevin Hassett said Wednesday on CNBC. “We expect that the Fed will catch up to the data soon. That’s going to be a really big, positive story.”
The Fed next will gather at its annual retreat in Jackson Hole, Wyoming, in late August. The event historically has featured a major policy speech from the chair.