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Author: Li Xiaoyin, Wall Street News
On Wednesday local time, the Federal Reserve FOMC meeting will be held under multiple pressures, and Chairman Powell may face the most critical moment during his term.
Although the market almost generally expects interest rate levels to remain unchanged at this meeting, Trump’s public pressure on Powell, policy differences among internal committee members, and market concerns about the independence of the central bank make the meeting politically significant.
Trump has repeatedly urged Powell to cut interest rates recently, and even threatened to fire the central bank chairman, and suddenly visited the Federal Reserve headquarters last week to put pressure on the market, which continued to heat up market concerns about the Fed’s independence.
There are also rare signs of disagreement within the Fed.Earlier, Fed Director Waller and Vice Chairman Bowman both publicly expressed support for the rate cut.If the committee decides to keep interest rates unchanged and the two vote against each other, it will set a record for the first time in 30 years that two directors voted against each other at a meeting at the same time.
Analysts believe any signal of a compromised central bank independence could push up consumer borrowing costs and negatively impact the economy.The core issue Powell faced at his press conference on Wednesday was not the interest rate level, but whether he would continue to serve as director after the presidential term ended in May next year.
Trump’s pressure escalates, central bank independence is tested
Trump’s pressure on Powell has escalated significantly over the past few weeks.Not only did he belittle Powell on a personal level, he also threatened to fire him for the excessive cost of renovation of the Fed’s headquarters of $2.5 billion, and even made a surprise visit to the Fed headquarters to put pressure on the latter.
Benson Durham, head of global policy and asset allocation at Piper Sandler, called Trump’s visit “the most ridiculous, shocking and clichéd performance” with the goal of deterring Powell.He believes Trump’s attempt to make Powell feel uncomfortable, prompting him to give up his board seat at the end of his term.
After visiting the Fed, Trump said he had a private conversation with Powell about interest rates and said “My impression is that Powell may be ready to cut interest rates.”Chris Hodge, chief American economist at Natixis CIP Americas, believes that Trump’s move is intended to create an expectation that “Powell will cut interest rates in September” and thus push Powell into a “loose corner.”
However, former senior Fed staff member and MacroPolicy Perspectives president Julia Coronado said Trump’s attempt to deter the central bank chairman would not succeed.She pointed out:
“This view that Powell is easily pushed into trouble or stress actually ignores all we know about him.”
The Fed has split for the first time in 30 years
In addition to external pressure, Powell also faces challenges from the inside.Fed governor Waller and vice chairman Bowman, who oversaw, have publicly expressed support for the rate cut at the upcoming policy meeting.
Previously mentioned that Waller believed that inflation caused by tariffs would be quickly transmitted, and pointed out that falling consumer spending and weak labor demand are the reasons for the current rate cut.Bowman also recently joined the support camp, saying that if inflation continues to ease, “it’s time to seriously consider rate cuts.”
If the committee decides on Wednesday to keep the federal funds rate unchanged between 4.25% and 4.5%, while Waller and Bowman vote for a loose policy, it will mark the first time since December 1993 that two directors disagree with the chairman at the same meeting.
Of the 60 meetings that Powell supported, only about 16% of them had at least one vote, and only 3% of the decisions voted against.
Vincent Reinhart, chief economist at BNY Investments and former Fed economist, pointed out that it is easier for directors to vote against at the end of their term, because the vote can be a “bargaining chip” that prompts the president to pay more attention to their views in post-conference statements or press conferences.
Market expectations remain unchanged, but interest rate cuts remain variable
Powell has been calling for patience, saying he hopes to observe the impact of tariff policies and cut interest rates after gaining greater confidence in the sustainable decline of inflation to 2%.However, US CPI inflation rebounded to 2.7% in June, indicating that the price transmission effect of tariffs is continuing to intensify.
Currently, federal funds futures trading data show that the probability of interest rate cuts in July is almost zero.
Former St. Louis Fed Chairman James Bullard believes that the Fed has room for interest rate cuts and September is a good choice.According to the CME FedWatch tool, the market’s expected probability of a 25 basis point cut in September is slightly higher than 60%.
But most economists remain cautious.Coronado pointed out that before the September meeting, there are two employment reports and two CPI reports to be released, and these data will be key to decision-making.
Jonathan Millar, senior American economist at Barclays, said:
“Inflation data may rebound from August to October, which makes it difficult for the Fed to cut interest rates by December. I think even December is a bit uncertain.”
