Fed Won't Cut Interest Rates Under Trump's Pressure
We have learned from Zhongjin's research report that the Federal Reserve (Fed) will maintain its interest rate policy at its September meeting, in line with market expectations. Two members opposed maintaining the current interest rate, but Powell and most officials tend to support a tightening stance: they believe that the inflation risks brought about by tariffs are still unresolved, and the labor market is still solid, making it not suitable for a rate cut. Powell also emphasized the Fed's independence, implying that it will not bow to political pressure. Zhongjin believes that the future several months' inflation effects of tariffs will continue to manifest, making it difficult for the Fed to cut interest rates in September if Trump continues to impose tariffs, and the timing of a rate cut may be further delayed. As for Trump's pressure demanding a rate cut, Zhongjin thinks that the market underestimates the Fed's determination to maintain its independence. The rate decision is made by the 12 members of the Federal Open Market Committee (FOMC) together, regardless of whether Trump fires Powell or not. Even if Trump dismisses Powell, it will be difficult to change the direction of monetary policy.
Zhongjin's specific views are as follows:
This meeting has released several signals: firstly, there is a divergence in policy direction within the Fed. The two members, Walker and Bowman, voted against maintaining the current interest rate, which is the first time since 1993 that two members have opposed the Committee's collective decision-making process. They both believe that the labor market is showing signs of fatigue, and it should be adjusted downward to prevent risks from spreading. Powell stated in his remarks after the meeting that their opinions were fully discussed during the meeting, and he also recognizes that there are certain downward risks in the employment market that need to be closely watched.
Secondly, Powell and most officials tend to support a tightening stance. Powell pointed out that based on Trump's first term experience, the inflation effects of tariffs may not be immediate but will gradually manifest over several months, and the costs will ultimately be borne by US enterprises and consumers. He also emphasized that although most officials believe that the inflation caused by tariffs is temporary and does not require an interest rate hike, this does not mean that a rate cut should be implemented to offset it. This stance fully reflects the Fed's desire to continue its tightening policy.
However, Powell also recognized that the current monetary policy has a certain degree of restraint, which puts downward pressure on the labor market. He also mentioned that US GDP growth in the second quarter rebounded somewhat, but the internal indicators softened, and housing investment was low, showing that economic momentum has weakened. However, he believes that these are not yet sufficient conditions for a rate cut, and the Fed will continue to maintain its patience and wait for clearer inflation data.
Thirdly, the Fed is determined to maintain its independence. Prior to this, Trump had repeatedly pressured the Fed to cut interest rates, even threatening to fire Powell. In response, Powell stated that the Fed will not adjust its interest rate path due to political pressure, and monetary policy's target is to achieve full employment and stable inflation, rather than helping the government reduce debt costs. He also emphasized that the Fed's independence as a system arrangement aims to ensure that it always serves the public interest, as long as it maintains independence and helps to achieve this goal. The Fed does not recognize political interference, which has been widely supported at the congressional level. Based on Powell's remarks, the Fed's internal stance is firm and has not wavered due to political pressure.
Zhongjin believes that the Fed has not yet prepared for a rate cut. When will it happen? It depends on inflation trends. Zhongjin predicts in its mid-term forecast report that US inflation may rise again in the second half of the year, but unlike the 2021-2022 period driven by overheated economic demand, this round of inflation is mainly driven by tariffs and is a one-time, structural shock (_US Macroeconomic Outlook for 2025 Second Half: A US-Style Rebalancing_). Therefore, the Fed may choose to maintain its status quo, waiting for inflation to peak before implementing easing measures. Based on these judgments and Trump's latest tariff policy, Zhongjin believes that it will be difficult for the Fed to cut interest rates in September if Trump decides to significantly increase tariffs after August 1.
Looking ahead, due to the US government's fiscal policy remaining relatively loose, economic growth and inflation resilience are expected to strengthen. In a monetary easing environment, monetary policy may focus on preventing inflation rather than countering deflation. This is not to say that the Fed cannot cut interest rates, but rather that the space for rate cuts is limited, and the policy interest rate will find it difficult to return to its pre-pandemic low level.
As for Trump's pressure demanding a rate cut, Zhongjin believes that the market may underestimate the Fed's determination to maintain its independence. The Fed's current system arrangement is not just one day's work but has been formed over many decades through practice and adjustments, including World War I and II, the post-war "fiscal-monetary" division of labor in the 1970s, the 2008 global financial crisis, and the 2020 COVID-19 pandemic. Fed officials deeply understand that their independence is crucial for US economic and financial markets, and they will strive to maintain it, making it unlikely that they will fully comply with Trump's instructions.