THE US Federal Reserve left its key lending rate unchanged on Wednesday (Jan 29) and adopted a patient “wait and see” approach to Donald Trump’s economic policies, in the first decision since his return to the White House.
Policymakers voted unanimously to keep the Fed’s benchmark lending rate at between 4.25 per cent and 4.5 per cent, the Fed announced in a statement.
“With our policy stance significantly less restrictive than it had been, and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance,” chair Jerome Powell told reporters after the decision.
The Fed’s pause follows three consecutive rate reductions which together lowered its key rate by a full percentage point.
In its statement, the Fed said the “unemployment rate has stabilised at a low level in recent months, and labour market conditions remain solid”.
Inflation however “remains somewhat elevated”, it said, while removing a reference in earlier statements to inflation making progress towards the bank’s long-term target of 2 per cent.
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The US central bank has a dual mandate from Congress to act independently to tackle inflation and unemployment.
It does so primarily by raising or lowering its key short-term lending rate, which influences borrowing costs for consumers and businesses.
Most analysts agree that the US economy is going fairly well, with robust growth, a largely healthy labour market, and relatively low inflation which nevertheless remains stuck above the Fed’s target.
Futures traders see a probability of close to 80 per cent that the Fed will extend its pause at the next rate meeting in March, according to data from CME Group.
Wait and see
Since returning to office on Jan 20, Trump has revived his threats to impose sweeping tariffs on US trading partners as soon as this weekend and to deport millions of undocumented workers.
He has also said he wants to extend expiring tax cuts and slash red tape on energy production.
Last week, Trump also revived his criticism of the independent Fed and Powell, whom he first appointed to run the US central bank.
“I will demand that interest rates drop immediately,” he said, later adding that he would “put in a strong statement” if the Fed did not take his views on board.
Speaking to reporters on Wednesday, Powell said it was “not appropriate” for him to respond to Trump’s comments, adding he had not spoken to the president since his return to the White House.
Most – though not all – economists expect Trump’s tariff and immigration policies to be at least mildly inflationary, raising the cost of goods faced by consumers.
“I think those policies are definitively inflationary, it’s just a question of what degree,” Zandi from Moody’s Analytics told AFP ahead of the rate decision.
“A big part of (the Fed’s) job in calibrating monetary policy is responding to what lawmakers are doing, and if they cannot get a fix on what they are doing, then that just argues for no change in policy, either higher or lower rates,” he added.
Asked about the likely impact of Trump’s proposals – including tariffs – Powell said the Fed would “wait and see” how they affected the economy.
Meaningful odds
At the Fed’s previous meeting, policymakers dialled back the number of rate cuts they expect this year to a median of just two, with some incorporating assumptions about Trump’s likely economic policies into their forecasts, according to minutes of the meeting.
Given the uncertainty about the effect of Trump’s policies on the US economy, analysts are now divided over how many rate cuts they expect the Fed to make this year.
In a recent investor note, economists at Goldman Sachs said their baseline forecast was for two quarter-point cuts, assuming a mild, one-time effect on inflation.
“We retain our baseline that the FOMC (Federal Open Market Committee) will cut rates 25bp (basis points) this year, in June,” economists at Barclays wrote, pointing to the underlying strength of the economy.
Zandi from Moody’s Analytics said he also expects two rate cuts later in the year.
But, “there are meaningful odds that the next move by the Fed may not be a rate cut, it might be a rate increase”, he added. AFP
