Washington (AFP) – The US Federal Reserve on Wednesday lowered interest rates for the first time this year, flagging slower job gains and risks to employment as policymakers face heightened pressure under President Donald Trump. The Fed cut the benchmark lending rate by 25 basis points, to a range between 4.0 percent and 4.25 percent, while penciling in two more cuts this year. Fed Chair Jerome Powell stressed that the central bank remains “strongly committed” to maintaining its independence from politics, however, when asked about the addition of a key advisor to Trump among its ranks this week.
He added that the Fed was “right to wait and see how tariffs and inflation and the labor market evolved” before lowering rates for the first time in nine months. Only new Fed Governor Stephen Miran — who has been serving in the Trump administration — voted against Wednesday’s decision. He favored a larger rate reduction of 50 basis points. The other 11 voting members of the rate-setting Federal Open Market Committee (FOMC) supported the quarter-point cut. Ryan Chahrour, an economics professor at Cornell University, said the vote appeared to signal “consolidation” among top Fed officials. “They want to be clear that they’re not influenced by political considerations, and I think they understand that lots of dissent in multiple directions sends a confusing message to markets,” he told AFP.
– ‘Stark divide’ – Fed projections, however, reveal a “stark divide” on the need for additional cuts this year, said economist Michael Pearce of Oxford Economics. Among 19 Fed officials assessing the path of monetary policy, seven projected no further reductions — even as a narrow majority overall penciled in two more cuts. Pearce said such a divide is “unusual,” and expects the October rate decision could again depend on jobs data. Powell told a press briefing that the Fed’s economic projections should be viewed “through the lens of probability.” Policymakers walk a tightrope balancing inflation and labor market risks as they mull changes to interest rates.
On Wednesday, the Fed said that “downside risks to employment have risen,” even as inflation has picked up and “remains somewhat elevated.” It noted that job gains have slowed while the unemployment rate — despite being low — also inched up. The bank has held rates steady this year, until now, as it monitored the effects of Trump’s tariffs on inflation. But Powell said the passthrough of tariffs to consumers has been slower and smaller than expected. “While there are inflation risks, the bigger risk right now is more Americans losing their jobs and a downward spiral starting toward a recession,” warned Navy Federal Credit Union chief economist Heather Long. The Fed lifted its 2025 growth forecast to 1.6 percent from June’s 1.4 percent projection, while making no change to unemployment and inflation forecasts.
– ‘Political attention’ – Beyond economic concerns, the Fed faces intensified pressure from Trump this year — with the president repeatedly criticizing Powell and calling for major rate cuts. Besides appointing Miran when another official retired early, Trump moved in August to fire Fed Governor Lisa Cook, sparking a legal fight that could have prevented her from attending Wednesday’s gathering. Miran’s confirmation — without resigning from the White House Council of Economic Advisers — risks giving a sense of political influence over Fed decisions, EY chief economist Gregory Daco earlier told AFP.
Already, Miran has come under fire from Democratic lawmakers for taking a leave of absence from his White House role rather than stepping down, a decision he attributed to his tenure at the Fed lasting only until January 31. Separately, the legal battle by Cook — the first Black woman on the Fed’s board of governors — could have broader implications for the bank. A federal appeals court ruled late Monday that Cook could remain in position while challenging her removal over alleged mortgage fraud. But the Trump administration plans to appeal — potentially bringing the case to the Supreme Court. The increased political attention is concerning, Daco said: “History has showed that in times when a central bank is under political influence, the economic outcomes are suboptimal.” This could mean higher inflation, lower growth, and more financial market volatility.
© 2024 AFP
