The Federal Reserve pushed the pause button on its interest rate cuts Wednesday, leaving its key rate unchanged at about 3.6 per cent after lowering it three times last year.
The central bank said in a statement that 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 do 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 two per cent. According to the Fed’s preferred measure, inflation was 2.8 per cent in November, slightly higher than a year ago.
Two officials dissented from the decision, with Governors Stephen Miran and Christopher Waller preferring another quarter-point reduction. U.S. President Donald Trump appointed Miran in September, and he had dissented at the three previous meetings in favor of a half-point cut. Waller is under consideration by the White House to replace Chair Jerome Powell, whose term ends in May.
The Fed’s decision to stand pat will likely fuel further criticism from Trump, who has assailed Powell for months for not sharply cutting short-term rates. When the Fed reduces its key rate, it tends to lower borrowing costs for things like mortgages, car loans, and business borrowing, though those rates are also influenced by market forces.
A key issue facing the Fed is how long it will remain on hold. The rate-setting committee remains split between those officials opposed to further cuts until inflation comes down, and those who want to lower rates to further support hiring.
In December, just 12 of the 19 participants in the committee’s meetings supported at least one more rate cut this year. Most economists forecast the Fed will cut twice this year, most likely at the June meeting or later.
One issue still overhanging the Fed when it comes to policy is the administration’s trade policy and its tariffs on many U.S. trade partners. Powell was asked at a press conference following the rate decision if the impact of tariffs had already moved through inflation. He said “a lot of it has,” and added that the Fed generally sees the import taxes as a one-time price increase.
“The expectation is that we will see the effects of tariffs flowing through goods prices peaking and then starting to come down, assuming there are no new major tariff increases,” said Powell, adding that this was the trend the U.S. central bank expects “to see over the course of this year.”
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Fed officials meet this week in the shadow of unprecedented pressure from the Trump White House. Powell said Jan. 11 that the Fed had received subpoenas from the Justice Department as part of a criminal investigation into his congressional testimony about a USD$2.5 billion building renovation.
Powell in an unusually blunt video statement said the subpoenas were a pretext to punish the Fed for not cutting rates more quickly. At a press conference after the Fed issued its rate decision, Powell declined to add anything to the earlier statement.
Although he declined to comment on the criminal investigation directly on Wednesday, Powell did respond to a question on what could happen to American households if the independence of the Fed was undermined — including by political influence.
“The point of of independence is not to protect policymakers or anything like that. It just is that every advanced economy, democracy in the world has come around to this common practice. It’s just an institutional arrangement that has served the people well, and that is to not have direct elected official control over the setting of monetary policy,” said Powell.
“And the reason is that monetary policy can be used through an election cycle to affect the economy in a way that will be politically worthwhile.”
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Powell continued: “I think if you lose that, first of all, it would be hard to restore the credibility of the institution if people lose their faith that we’re making decisions only on the basis of our assessment of what’s best for the wider public, rather than trying to benefit one group or another. If you lose that, it’s going to be hard to retain it. And we haven’t lost it. I don’t believe we will. I certainly hope we won’t.”
The Bank of Canada also held its key policy rate unchanged on Wednesday, and Gov. Tiff Macklem spoke to reporters who asked about the threats facing the U.S. central bank. He described how the uncertain economic outlook for Canada was at least partly because of this situation.
“The threat to independence of the central bank in the United States is one thing that has sort of been contributing to this sense of uncertainty. The U.S. Federal Reserve is the biggest, most important central bank in the world, and we all need it to work well. A loss of independence of the Fed would affect us all,” said Macklem.
“For Canada, our financial markets are particularly integrated with the United States. So it would particularly affect us. Central banks with operational independence to form monetary policy do a better job of delivering price stability for their citizens.”
Macklem added: “Under fed chairman’s fed Chairman Powell leadership, he’s doing a good job at leading the Fed based on evidence, based on facts, based on best economic judgments of the FOMC (Federal Open Market Committee), I hope it stays that way. That’s going to be important for everyone.”
Last week, the Supreme Court took up Trump’s attempt from last year to fire Fed governor Lisa Cook over allegations of mortgage fraud, which she denies. No president has fired a governor in the Fed’s 112-year history. The justices at an oral argument appeared to be leaning toward allowing her to stay in her job until the case is resolved.
Powell attended the Cook hearing at the Supreme Court. When asked why he decided to attend, Powell said, “I would say that that this case is perhaps the most important legal case” in the Fed’s history. “And I as I thought about it, I thought, it might be hard to explain why I didn’t attend.”
The president’s efforts to pressure the Fed may have backfired, economists say, as Republicans in the Senate voiced support for Powell and threatened to block Trump’s replacement chair.
When asked by reporters Wednesday if he was confident the Fed can retain its independence, Powell said, “Yes,” and added, “I’m strongly committed to that and so are my colleagues.”
Trump has suggested he is close to naming a new Fed Chair, to replace Powell once his term ends in May. The announcement could come as soon as this week, though it has been delayed before.
Powell has the option of remaining as a Fed governor beyond May but told reporters he hadn’t made a decision about whether to stay or leave.
Only 12 of the 19 members of the Fed’s rate-setting committee have a vote, including all seven members of the board of governors, the president of the New York Fed, and a rotating group of four presidents from the regional Fed banks.
This year, Beth Hammack, president of the Cleveland Fed; Neel Kashkari, president of the Minneapolis Fed; Lorie Logan, president of the Dallas Fed; and Anna Paulson, president of the Philadelphia Fed, will vote on rate decisions. All have recently expressed some skepticism of the need for further cuts in the immediate future.
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.
With businesses barely adding jobs, consumers remain gloomy about the economy. The Conference Board’s measure of consumer confidence dropped to an 11-year low in January, the business research group said Tuesday.
– With files from Global’s Ariel Rabinovitch
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