Fed Chair Powell Faces New Test Balancing Rate Cuts and Independence

Federal Reserve Chair Jerome Powell recently hinted that the US central bank might cut interest rates as early as before or during its September meeting, marking an apparent shift in tone after months of resisting pressure from President Donald Trump, who has repeatedly urged the Fed to slash rates to support the American economy.

Powell explained that the US economy has slowed, growing at just 1.2% annually in the first half of this year compared to 2.5% last year, according to a recent report published by The Associated Press. He also noted a “marked slowing” in US job demand, which  could lead to higher unemployment. Experts say these factors are driving the Fed to consider easing borrowing costs to help stabilise growth.

However, Powell also warned that Trump-imposed tariffs have pushed up prices and could continue to drive inflation higher — a development that makes the central bank cautious about cutting rates too quickly. Currently, the Fed’s key short-term interest rate stands at 4.3%, far above the one percent level President Trump desires, per AP.

The Tightrope of Fed Independence

Powell is now facing the delicate task of cutting rates without appearing to bow to political pressure. Since his appointment by Trump back in 2017, Powell has time and again resisted presidential demands on monetary policy.

Beth Hammack, president of the Federal Reserve’s Cleveland branch and a member of the rate-setting committee, told The Associated Press that she remains “laser focussed” on delivering positive outcomes for the public all while tuning out external noise. Hammack also stressed that inflation appears to be relentlessly high and moving in the wrong direction.

Powell’s apparent silence on the Fed’s independence during his recent speech at an economic symposium in Wyoming was seen by experts as a deliberate sign. Peterson Institute for International Economics chief Adam Posen told the US-based news agency that Powell’s choice not to address that matter of independence directly “was a way of trying as best they could to signal we’re getting on with the business.”

Political Pressure Intensifies with Threats Against Fed Officials

Meanwhile, Trump has in recent weeks seemingly escalated his pressure campaign, threatening to fire Fed Governor Lisa Cook unless she resigns amid unproven allegations of mortgage fraud. Cook, for her part, has refused to be “bullied” out of her position.

Removing Cook would provide Trump with an opportunity to appoint his loyalists to the Fed’s governing board, which ultimately votes on interest rate decisions. According to the report, Trump has already nominated White House economist Stephen Miran to replace a departing governor.

Michael Strain of the American Enterprise Institute pointed out that Powell has a history of resisting Trump’s pressure. “It would be odd, I think, if on his way out the door, he caved for the first time,” AP quoted Strain as saying.

Uncertain Road Ahead for the Fed

Some economists have warned that Powell may be overestimating economic risks. Strain suggested that inflation could worsen while the job market remains strong, forcing the Fed to raise rates again next year — a move that could possibly damage its credibility in controlling inflation.

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