[Text/Observer Network Wang Yi] Under the pressure of U.S. President Trump's administration demanding interest rate cuts, the U.S. Federal Reserve announced for the third time on May 7 to maintain the interest rate unchanged within the range of 4.25% to 4.50%.
Fed Chairman Powell stated at a press conference that "Trump's demand for interest rate cuts will not affect the Fed's work. It is appropriate to cut interest rates in some cases, and it is inappropriate to do so in others, and I cannot confidently say what the right path for interest rates is."
The Federal Reserve announced the maintenance of interest rates unchanged. After several interest rate cuts in the second half of 2024, the Fed decided to keep interest rates unchanged in January and March this year. This monetary policy meeting was held when the U.S. financial market and economy were highly volatile due to Trump's tariffs. It is widely believed that the Fed would continue to observe the impact of tariffs on the economy before taking action.
"The Fed is still in a wait-and-see state, waiting for uncertainty to be eliminated," said Ashish Shah, chief investment officer at Goldman Sachs Asset Management. Recent employment data better than expected supports the Fed's wait-and-see stance; only when the labor market weakens sufficiently will the Fed restart the easing cycle.
Target federal funds rate from 2000 to present, chart by The Wall Street Journal.
After the Fed's interest rate decision consistent with market expectations was announced, stock trading on the same day remained basically flat, with the yield on the 10-year U.S. Treasury note falling slightly by 0.03 percentage points to 4.28%.
According to The Wall Street Journal, since the outcome of the July 7 meeting had been widely predicted, the focus was on Powell's remarks on economic prospects at the press conference to infer the Fed's future monetary policy direction.
In the statement, the Fed noted that the labor market remains "solid," but "uncertainty about the economic outlook has further increased," and "the risks of rising unemployment and rising inflation have increased."
Unemployment and inflation are two key indicators closely monitored by the Fed. Reuters analysis indicates that if both rise simultaneously, these conflicting risks will make the Fed face a difficult choice in the coming months, forcing it to choose which risk to address first.
Chairman Powell stated in the press conference that he could not yet say "how this will develop," whether he is more concerned about inflation or growth. The New York Times pointed out that Powell's remarks are not much different from the Fed's previous position of not "rushing" to cut interest rates; he just emphasized that the Fed is "ready" to "respond promptly to potential changes in the economy," and the cost of waiting remains "low."
The article argues that Powell's comment that "I am completely unclear what we should do now" undermines expectations that the Fed will cut interest rates in June. In the last monetary policy meeting, the Fed expected to cut interest rates by half a percentage point by the end of this year. According to the Financial Times of the UK, stronger-than-expected non-farm payroll data in April led economists to predict that the Fed's first interest rate cut this year might come as early as September.
Should interest rates be cut immediately?
Since the last monetary policy meeting in March, the U.S. economic environment has undergone significant changes. In early April, Trump launched a tariff war against the world, although he later postponed the imposition of certain tariffs, the 10% "minimum benchmark tariff" imposed on all countries, as well as the previously announced tariffs on steel, aluminum, and automobiles, remain effective.
The Wall Street Journal analysis points out that the impact of tariffs may weaken an economy's ability to provide goods or services while pushing up prices. Until companies have a clearer understanding of their basic cost structure, unpredictable tariff measures may weaken profits and inhibit new investments.
These policy changes put the Fed in a dilemma. While assessing the potential consequences of Trump's economic policies, the Fed also had to deal with threats from the Trump administration. Although Trump withdrew his threat to "fire" Powell last month, he still pressured him to cut interest rates. U.S. Treasury Secretary Besent stated on May 1 that the 2-year U.S. Treasury yield being lower than the federal funds rate is a signal indicating that the Fed should cut interest rates.
To combat inflation, the Fed raised interest rates to their highest level in 20 years in 2022 and 2023. Last year, as inflation declined, the Fed reduced interest rates by one percentage point to around 4.3%.
The New York Times states that unlike the past, the Fed cannot preemptively cut interest rates to counter early signs of economic weakness. This is because of inflation: the price pressures that surged after the pandemic have not been fully eliminated, and Trump's tariff policies could potentially reignite these pressures.
On May 7, Federal Reserve Chairman Jerome Powell delivered a speech. Visual China.
Powell believes that the current situation does not allow the Fed to take preemptive actions, "because before seeing more data, we actually do not know what the correct response to the data is."
The New York Times states that it is too early to judge whether the inflation spike caused by tariffs is temporary or will become a more persistent phenomenon. So far, the Fed's inflation expectation indicators show that inflation will indeed remain controllable after the initial surge, but Fed officials do not want to repeat the mistakes of a few years ago when they underestimated the persistence of inflation. Therefore, the threshold for a rate cut is higher this time.
The article points out that before restarting rate cuts, officials are likely to need clear evidence that the labor market is starting to weaken, such as monthly job growth stalling or turning negative, or rising layoffs, which may enhance the confidence of the U.S. central bank to start cutting interest rates.
However, waiting for data to show may mean acting too late, forcing the Fed to take more aggressive rate cut measures later. The Wall Street Journal reports that some people believe maintaining interest rates at unnecessarily high levels during an economic slowdown may lead to further economic decline.
"The longer they stay idle, the more they passively tighten," said George Goncalves, head of U.S. macro strategy at MUFG, Mitsubishi UFJ Financial Group. Waiting until July or September to cut rates increases the possibility that the Fed will have to make larger adjustments, "this is too long, and you might lose the real opportunity to stimulate the economy."
The New York Times argues that the Fed's patient attitude toward cutting interest rates may escalate its tense relationship with Trump.
On July 7, when asked whether he plans to continue serving as the central bank governor until the end of his term, Powell responded that his focus is on "getting through this difficult period we are currently in."
"This is a challenging situation, and it is our current priority," Powell said.
This article is an exclusive contribution by the Observer Network, unauthorized reproduction is prohibited.
Original source: https://www.toutiao.com/article/7501892807242727963/
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