Will the Federal Reserve yield to Trump's demands for interest rate reductions?
Fed's Monetary Policy Amid Political Pressure and Internal Divisions
The Federal Reserve (Fed) embarked on a period of monetary easing in July 2019, marking the end of a decade-long stability in interest rates. This shift was initiated with rate cuts, a move that marked the first such action since 2009. However, the Federal Open Market Committee (FOMC) was divided on the extent and timing of these cuts, reflecting political pressure from President Donald Trump.
By March 2020, in response to the COVID-19 pandemic, the Fed aggressively cut rates to near zero and implemented large-scale quantitative easing (QE) measures to support the economy. The FOMC's divisions were evident, with some members advocating for more aggressive easing. This internal discord represented a rare level of dissent amid external political pressure.
President Trump had been urging the Fed to cut rates more rapidly and aggressively, but Chair Jerome Powell and much of the Fed sought to maintain a measured approach to avoid undermining the Fed’s independence. Trump openly criticized Powell, calling him "too late" or "playing politics," and even discussed potential removal of Powell, but no changes occurred, and tensions remained high.
Looking ahead, the second-quarter GDP data due on Wednesday is expected to show year-on-year growth slowed to 1.2%. This slowdown may be a "reality check" after strong growth in the first quarter, which was due to companies frontloading ahead of tariffs.
Investors are closely watching for any hints from Jay Powell about the pace of future easing. As of now, markets are pricing in a less than 3% chance that the Fed will cut in July. However, economists polled by Reuters still expect at least one quarter-point reduction later this year.
Meanwhile, the Eurozone economy is being closely watched by the European Central Bank (ECB) for signs of how global trade turmoil is affecting it. The impact of US developments on Eurozone GDP is expected to have been negative. The ECB has trimmed the probability of a further rate cut this year to about 60%.
Futures markets expect one quarter-point reduction with a high chance of a second by December. Economists surveyed by Reuters expect the inflation rate to have fallen to 1.9% in July, down from 2% in June. Shinichi Uchida, the deputy governor of the Bank of Japan, signaled a possibility of the central bank resuming its tightening cycle, citing the trade deal clinched between Washington and Tokyo.
Despite the political pressure and internal divisions, the Federal Reserve is expected to keep interest rates on hold next week. The focus now shifts to the data that will be released next week, with numerous points, including GDP and inflation rates, expected to offer important signals about the Eurozone's growth and inflation.
- The Federal Reserve's monetary policy, amid political pressure and internal divisions, initiated a period of monetary easing in July 2019, affecting the global markets and economy, including personal-finance and business sectors.
- In response to the COVID-19 pandemic, the Fed aggressively cut interest rates to near zero and implemented large-scale quantitative easing, impacting inflation rates and interest rates across industries and finance.
- Investors are closely monitoring the Fed's next moves, watching for any hints from Chair Jerome Powell about the pace of future easing and its impact on investing in various markets.
- The Eurozone economy, closely watched by the European Central Bank, is being affected by global trade turmoil, which is having a negative impact on Eurozone GDP.
- Economists surveyed by Reuters expect the inflation rate to continue falling, impactingpersonal-finance and general-news, while futures markets expect a quarter-point reduction in interest rates with a high chance of a second reduction by December.
- As the Federal Reserve is expected to keep interest rates on hold next week, the focus shifts to the data that will be released, offering important signals about the Eurozone's growth and inflation, and the impact on various industries, finance, technology, politics, and sports.
- The Bank of Japan, citing the trade deal clinched between Washington and Tokyo, signaled a possibility of resuming its tightening cycle, highlighting the interconnectedness of global finance and economy, and the role of political and economic developments in shaping business and industry.
