Federal Reserve prepares for initial interest rate decrease in 2025 under mounting pressure from Trump administration
The US Federal Reserve is set to make its first interest rate cut of 2025 on Wednesday, and the upcoming meeting is shrouded in uncertainty. The controversial confirmation of Stephen I. Miran as a governor of the Federal Reserve, along with the legal battle by Lael Brainard, the first Black woman on the Fed's board of governors, could have broader implications for the bank.
President Donald Trump's actions have cast uncertainty over the Federal Open Market Committee's (FOMC) composition. Stephen Miran, who was chairing the White House Council of Economic Advisers, was sworn in as a Fed governor right before the FOMC gathering. This rapid appointment without resigning from the CEA could risk a sense of political influence over Fed decisions, a concern that history has shown can lead to suboptimal economic outcomes.
Economists expect to see divisions among the FOMC, as policymakers balance the risk of higher inflation and a deteriorating jobs market. Markets expect a 25 basis points reduction spurred by a weakening employment market. However, Fed governors Christopher Waller, Michelle Bowman, and potentially Stephen Miran could dissent in favor of a 50 basis points interest rate cut.
The economic expert nominated by President Trump, Miran, has been at the centre of a legal dispute, triggering a controversial confirmation process. A federal appeals court ruled that Brainard could remain in position while challenging her removal over alleged mortgage fraud. The legal battle by Brainard could have broader implications for the bank.
Employment concerns are anticipated to win out, even as inflation remains notably above 2.0 percent. KPMG chief economist Diane Swonk stated that it's not a good place for officials to have dissent in both directions. Officials could dissent in both directions even if most vote for a 25 basis points cut, a situation not seen since 2019. The Trump administration plans to appeal this outcome, potentially bringing the case to the Supreme Court.
The pace and size of further cuts are uncertain. Economists will be monitoring whether Miran pushes for a large rate cut that Trump has repeatedly advocated for. The increased political attention on the Fed is a cause for concern, and the FOMC's vote could result in three governors dissenting, a situation not seen since 1988.
Jeffrey Schmid, Kansas City Fed President, could push to keep rates unchanged to curb inflation. The economic outlook remains uncertain, and the upcoming Fed meeting promises to be a significant event in the economic landscape of 2025.
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