Donald Trump didn’t get what he wanted from the Federal Reserve today. But if he tries, he can find the obvious bright spot in the subtext.
The Fed’s board split again today on interest rates, but this time less divisively than in December, and in favor of maintaining the status quo. For the first time in three months, the Fed kept interest rates steady, and signaled that there may not be further reductions in the near future:
The Federal Reserve entered a new holding pattern on interest rates Wednesday and signaled little urgency to resume cuts after contentious reductions at officials’ three previous meetings.
The decision to hold the benchmark federal-funds rate steady in a range between 3.5% and 3.75% was approved on a 10-2 vote.
Officials made fairly modest changes to the post-meeting statement explaining their decision, retaining language that has typically signaled openness to further moves without suggesting any hurry to make them.
The Fed has navigated between competing risks for months. Inflation slowed in 2023 and 2024 but then stalled out above the central bank’s 2% goal over the past year, arguing for patience. Meanwhile, concerns over a cooling labor market prompted last year’s three cuts.
This came as a bit of a surprise. Trump wants lower interest rates to incentivize more investment in growth-producing activities, particularly in manufacturing. Inflation concerns have eased somewhat, but not necessarily enough to push the line with another round of incremental cuts. Of course, even at the current level, the benchmark rate is well on the historically low side already, and the shift in population occurring with outflows of illegal aliens may help to reduce inflation in housing prices and mortgage rates without more intervention from the Fed.
The underlying message helps Trump anyway. As Christopher Rugaber points out in his Associated Press analysis, keeping rates steady and signaling no changes ahead amounts of a vote of confidence in the US economy for the next few months:
The central bank said there are signs the job market has stabilized while it also said growth was “solid,” an upgrade from last month’s characterization as “modest.”
With the economy growing at a healthy pace and no signs of deterioration in hiring, Fed officials likely see little reason to rush any further rate cuts. While most policymakers expect to reduce borrowing costs further this year, many want to see evidence that stubbornly elevated inflation is moving closer to the central bank’s target of 2%. …
Larger-than-usual tax refunds over the next few months should help fuel more consumer spending, economists expect. And faster growth could eventually boost hiring, which has been noticeably weak even as the economy is expanding.
That makes some sense, especially given the GDP reports from the past two quarters. We’ll see the Q4 report at the end of next month, which may take a small hit from the Schumer Shutdown, but which should build on Q3’s 4.4% annualized growth rate. All of the economic indicators except jobs have shown significant and sustained growth, thanks in part to a significant narrowing of the trade gap. Tariffs have not had an appreciable impact on growth since Q2 and appear to have been largely aborbed and eclipsed by other areas of growth. Wages continue to grow faster than inflation despite the weak job-creation numbers, which could indicate that those numbers are masking a large-scale transfer of work from illegal workers leaving the country.
The White House will still want looser credit in order to get even more growth. As it stands, though, there is ample room for Trump and his team to declare this decision a recognition of their economic policies and a win for “affordability.” That message will likely resonate more with midterm voters than foreign policy or even immigration achievements. Let’s see if the Trump team and the GOP can pick up the ball and run with it in the days ahead.
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