Inflation is falling in the USA
The Fed’s classic job is to keep inflation under control. The inflation rate fell further in September – but less than expected. Consumer prices rose by 2.4 percent compared to the same month last year. The inflation rate is the lowest since February 2021. In August it was still 2.5 percent. The central bank is aiming for an inflation rate of two percent in the medium term.
The Fed had already signaled further interest rate cuts this year in September. The Fed expects an average key interest rate of 3.4 percent for the coming year. The central bank will only publish new forecasts in December – and will then also take Trump’s new presidency into account.
In its current statement on interest rate cuts, the central bank deleted the sentence that it had “gained more confidence” that inflation was moving sustainably towards 2 percent. Fed Chairman Powell explained this by saying that it had nothing to do with the fact that the Fed had lost trust. It is assumed that the inflation rate would level off at 2 percent. With regard to future interest rate cuts, Powell emphasized that there is nothing in the economic data that suggests that we need to “hurry up”.
Trump wants low interest rates
The Fed works independently of the US government. During his time in the White House, the Republican Trump repeatedly clashed with the Fed, suggested interest rate cuts and heavily criticized Fed Chairman Powell. There are fears that he will try to interfere in monetary policy decisions again after he returns to the White House in January.
In addition, Trump is planning high tariffs and tax cuts. It is expected that this policy will cause inflation to rise again. It remains unclear whether, given these prospects, the Fed will continue to significantly lower interest rates – or whether it will continue to pursue a policy of high interest rates for a longer period of time. High interest rates slow demand. Private individuals and businesses spend more on loans – or they borrow less money. Growth is slowing, companies cannot pass on higher prices indefinitely – and ideally the inflation rate is falling.
Unsurprisingly, Powell was evasive about the impact of Trump’s victory in the Fed decision press conference. “In the short term, the election will have no impact on our political decisions,” he said. It is not known how and to what extent economic policy will change in the long term, said Powell. “So we don’t know how this will affect the economy.”
Powell will remain in office until 2026
In his second term, Trump is likely to at least try to pressure the Fed to cut interest rates. The staff at the central bank is also likely to change in the long term. During his time as US President, Trump nominated Powell for his first term as Fed chief, but then criticized him for raising interest rates. He recently said that he would not fire Powell. That probably wouldn’t be possible legally.
When asked if Powell would leave if Trump asked him, the Fed chief responded with one word: “No.” Powell’s term ends in 2026 – then Trump can nominate a new Fed chief. He had already stated that he would not nominate Powell again.
