Why Did the US Fed Defy Trump Yet Again and Keep Rates Unchanged?

The US Federal Reserve’s latest monetary policy decision to keep interest rates unchanged came as a no-brainer to market participants. However, it likely wouldn’t have gone down well with Fed Chair Jerome Powell’s biggest arch nemesis in recent times, US President Donald Trump.

The Fed's decision to leave its federal funds rate unchanged at 4.3%, the level where it has stood since the central bank’s three cuts last year, defied Trump’s repeated calls for rate cuts, yet again. Ironically, the trigger behind the Fed’s caution is Trump’s own sweeping trade tariffs, which threaten to rekindle inflationary risks across the broader US economy.

With the clouds of uncertainty blanketing Trump’s tariff policies, Fed officials are reluctant to jump back onto a rate-cutting cycle.  Rather, the consensus leans in favour of a wait-and-watch mode to see how Trump’s trade policies impact the broader economy.

Thus far, the introduction of tariffs has resulted in an uptick in costs of some goods, such as appliances, furniture, and toys, and overall inflation, although the quantum of the spike in much less than what was anticipated earlier. That said, the risks are not completely gone as the actual impact of trade tariffs may be felt more prominently after the August 1 trade deal deadline.

“Higher tariffs have begun to show through more clearly to prices of some goods, but their overall effects on economic activity and inflation remain to be seen,” Fed Chair Jerome Powell said.

He added that a “reasonable base case” could be that effects to inflation will be “short lived.” But he also cautioned that levies could cause inflationary changes that are “more persistent.”

“For the time being, we’re well positioned to learn more about the likely course of the economy and the evolving balance of risks before adjusting our policy stance,” he said. “We see our current policy stance as appropriate to guard against inflation risks.”

“The policy guidance remained similar- on tones of data dependency. Fed’s ability to cut rates will largely depend on tariffs and their repercussions on inflation, especially goods inflation. The current pause is on expected lines,” analysts at Ionic Wealth wrote in a note.

Looking ahead, the analysts feel that expectations for a September rate cut are still ripe, although Fed’s comments seem to have reduced the probability. This comes after Powell emphasized patience and suggested that 'no decisions' have been made on September rate cuts.

Some Dissent Makes Its Way

Unlike most recent policy decisions, which have seen broad consensus among Fed officials, the latest meeting revealed growing internal divergence. Governors Christopher Waller and Michelle Bowman voted in favour of lowering borrowing costs, while nine officials, including Powell, opted to keep rates unchanged.

It marks the first time in over three decades that two of the sitting Fed governors have dissented in a rate decision. Both Waller and Bowman were appointed during Trump’s first term, an era during which the president frequently criticised the Fed for not being dovish enough.

Devarsh Vakil, Head of Prime Research at HDFC Securities, believes the emergence of dissent on the Fed committee could stir some unease among investors.