After provoking a strong fall in the financial markets two weeks ago by announcing that he could dismiss the president of the Fed, Jerome Powell, Mr. Trump then backtrack, saying that he had no intention of doing so. However, he and the secretary of the Treasury, Scott Bessent, hammered that the Fed should lower its rates.
They claim that inflation has gradually slowed down and that high borrowing costs are no longer necessary to slow down the price increase. The Fed has increased its short -term rates in 2022 and 2023, faced with the outbreak of inflation linked to the pandemic.
Furthermore, Elon Musk, who is at the head of the Trump’s Doge -Effective Department (DOGE), suggested last Wednesday that the DOGE should examine the Fed expenses devoted to its infrastructure.
This increased surveillance shows that even if the Trump administration renounces its threats to dismiss Mr. Powell, the Fed remains subject to unusually strong political pressures, despite its status as an independent agency.
Despite everything, the Fed will most likely maintain its unchanged key rate at around 4.3 % during its meetings on Tuesday and Wednesday. Mr. Powell and several of the 18 other officials sitting on the Fed rate fixing committee said they wanted to observe the impact of Mr. Trump’s customs duties on the economy before any action.
Trump, however, wrote on his social social platform on Friday that there was “no inflation” and that the prices of grocery products and eggs had dropped, and that gasoline had fallen to US $ 1.98 per gallon.
It is not entirely true: the prices of grocery products have jumped by 0.5 % in two of the last three months and are up 2.4 % compared to last year. The prices of gasoline and oil have dropped – the costs of gasoline fell 10 % compared to last year – continuing a long -standing trend, partly due to the fears of weakening the economy. Nevertheless, the American Automobile Association indicates that the price of petrol at the national level amounts to an average of US $ 3.18 per Gallon.
Inflation has decreased significantly in March, an encouraging sign, even if, in the first three months of the year, it was 3.6 %, according to the privileged indicator of the Fed, well above its 2 %target.
Without customs duties, economists believe that it is possible that the Fed will soon reduce its key rate, because it is currently at a level intended to slow down loans and expenses, and to contain inflation. However, the Fed cannot lower its rates now, Mr. Trump’s general customs duties being likely to lead to prices in the coming months.
The prudence of putting
Vincent Reinhart, chief economist at BNY, said the Fed was “marked” by what happened in 2021, when prices increased due to supply difficulties, and Powell and other Fed officials argued that this increase would probably be “transient”. Instead, inflation reached a peak of 9.1 % in June 2022.
This time, they will be more cautious, according to him.
“It is a Fed who will have to wait for evidence and soon adapt,” added Mr. Reinhart.
In addition, Mr. Trump’s harassment towards Mr. Powell complicates the task of the president of the Fed to reduce rates, because such a decision would be perceived as a submission to the White House, observed Preston Mui, an economist at Employe America.
“We could imagine a world where the Trump administration would not exercise any pressure and where the rates would be lowered (…) earlier, because they would feel at ease to justify this decision by the data,” he said.
For his part, Powell said last month that customs duties would probably increase inflation and slow down the economy, a delicate combination for the Fed. The central bank would generally raise its rates – or at least keep them at a high level – to combat inflation, while it would lower them to stimulate the economy in the event of an increase in unemployment.
Powell has argued that the impact of customs duties on inflation could be temporary – a punctual price increase – but recently said that it “could also be more persistent”. This suggests that Mr. Powell will want to wait, potentially several months, to ensure that customs duties do not durably increase inflation before considering a drop in rates.
Some economists predict that the Fed will not lower its rates before its September, or even later meeting.
However, Fed officials could act earlier if customs duties impact the economy enough to cause layoffs and increase unemployment. Wall Street investors seem to expect such an outcome: they provide that the first decline will take place in July, according to the term contracts.
Fed under surveillance
In addition, Elon Musk criticized the Fed on Wednesday for spending US $ 2.5 billion in a complete renovation of two of his buildings in Washington.
“Since in the end, it is taxpayer money, we should certainly check whether the federal reserve actually spends US $ 2.5 billion for its interior architect,” said Elon Musk. It’s surprising. “
Fed officials recognize that the cost of renovations has increased due to the outbreak of building materials and labor, due to postpandemic inflation. Former officials of the Fed, speaking discreetly, claim that local regulations have forced Fed to consider underground expansion, rather than building higher buildings, which has increased costs.
Furthermore, Kevin Warsh, former Fed governor and potential candidate for the succession of Mr. Powell for the expiration of his mandate next year, recently said that the Fed was under increased surveillance due to his inability to control prices.
“Fed’s current injuries are largely self-inflicted,” he said at a conference on the International Monetary Fund at the end of April, where he also criticized the Fed for his participation in a global climate change forum. “Strategic reset is necessary to mitigate credibility losses, reputation changes and, above all, the negative economic consequences for our fellow citizens.”
Mr. Powell, for his part, said last month that “the independence of the Fed is widely understood and supported in Washington, in Congress, where it really counts”.
