Despite mounting pressure from U.S. President Donald Trump, the Federal Reserve (Fed) is largely expected to keep interest rates unchanged in the 4.25-4.50 percent range at its policy meeting this week.
While concerns about the labor market persist, most Fed policymakers remain focused on the potential inflationary impact of Trump’s tariffs, noting that escalating trade measures could reverse progress toward the Fed’s 2 percent inflation target.
Consumer inflation rises in June
The recent U.S. trade agreements with Japan and the EU, which set tariffs at 15 percent, suggest that overall import duties may ultimately be far lower than the steep rates announced by Trump on his April 2 “Liberation Day.” Nevertheless, U.S. tariffs remain at their highest level in 90 years, and the impact is beginning to surface in consumer behavior.
A spike in the prices of items such as furnishings and clothing contributed to a 3.5 percent annualized rise in consumer inflation in June. Given the recent experience with 40-year-high inflation, policymakers are increasingly wary that a fresh wave of price increases could concern consumers, potentially setting off a broader inflationary spiral.
While Fed Chair Jerome Powell acknowledges that a broader inflationary spiral is just one of many possible outcomes, he has emphasized that the central bank can afford to wait for more data before making any changes to interest rates. With the unemployment rate holding at 4.1 percent, Powell has previously noted that there is room for patience in assessing the economic impact of tariffs and inflation pressures.
Read: ECB maintains interest rates at 2 percent, pausing its year-long easing cycle
Policymakers voice concerns over labor market
According to the CME FedWatch tool, 96.9 percent of traders expect the Fed to keep rates steady on Wednesday and over 60 percent expect the central bank to cut rates by 25 basis points in September. Another rate cut is expected in December, which would bring down interest rates to the 3.75-4.00 percent range.
During a rare and tense visit to the Fed headquarters last week, Trump renewed his push for lower interest rates. However, he also remarked that he did not believe it was necessary to remove Powell from his position.
Federal Reserve Governor Christopher Waller, a potential candidate to succeed Powell, has voiced concern that private-sector job growth is slowing to near stall speed. He warned that without looser credit conditions, businesses may begin resorting to layoffs. In June, private-sector hiring made up only about half of the 147,000 jobs added in the U.S., and Waller believes other indicators suggest that figure may overstate actual gains.
Fed Vice Chair of Supervision Michelle Bowman has also raised concerns about weakening labor market conditions and indicated that a rate cut might be necessary to help prevent further deterioration.
Several other officials, including Boston Fed President Susan Collins, believe that the recent modest rise in prices indicates tariffs may not exert as much upward pressure on inflation as previously feared.
