Fed chief Jerome Powell resists Donald Trump pressure for lower interest rates

“A reasonable base case is that the effects on inflation could be short-lived, reflecting a one-time shift in the price level,” Powell said.

“But, it is also possible that the inflationary effects could instead be more persistent, and that is a risk to be assessed and managed.

“We’re going to need to see the data, and it can go in many different directions. We’re going to make a judgment based on all of the data.”

The data to date appears benign. The economy grew at an apparently very robust 3 per cent annualised rate in the June quarter, prompting the White House to claim it as evidence that Trump’s policies have ignited a new “Golden Age”.

Beneath the headline number, however, things weren’t quite as golden. In the first quarter of the year, the economy actually contracted, as companies front-loaded their imports to get in ahead of Trump’s tariffs. In the June quarter, those bloated inventories were run down and imports fell away.

If the first half is looked at as a whole, the economy grew at an annualised rate of 1.25 per cent. In the same half last year, when Joe Biden was in the White House, it grew at 2.3 per cent.

Moreover, the US inflation rate, at 2.7 per cent, is still above the Fed’s target of 2 per cent and, even before the bulk of Trump’s tariffs are active, there are signs of tariff-related goods inflation. To date, based on the available data, there is no evidence of a need to reduce rates. Indeed, a case could be mounted for a rate rise.

Powell said he still expected tariffs to flow through to consumer prices but that the process might be slower than expected and that some companies might be finding it difficult to fully pass on the costs to consumers because consumers were unwilling or unable to pay higher prices.

A case in point is the US car manufacturing sector, where the companies have yet to raise their prices despite substantial tariff-related cost increases. General Motors has estimated the tariffs will cost it between $US4 billion and $US5 billion ($6.2 billion-$7.8 billion) this year. Ford said on Wednesday that the tariffs would cost it $US3 billion this year.

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Some US companies are starting to raise prices. Amazon, Walmart and other retailers have said they will have to raise some prices. Also on Wednesday, giant consumer products group Procter & Gamble said it would raise prices on about a quarter of its product range because it expects a $US1 billion hit from the tariffs.

In theory, the tariffs should produce a one-time impact on prices and inflation.

The complex layers of duties Trump has imposed on raw materials, semi-finished and finished goods, the messy way in which the tariffs are being rolled out and the degree of uncertainty in what the final trade picture will look like, given the key deals with major trading partners are more statements of intent rather than conventional detailed and binding trade agreements, however, complicates evaluations of their effects.

Powell said it was a “very dynamic time” for trade negotiations, but “we are still a ways away from seeing where things settle down”.

“What we see now is, basically, the very beginning of whatever the effects turn out to be on goods inflation,” he said. “They may be less than people estimate, or more than people estimate. They are not going to be zero.

“Consumers will pay some of this. Businesses will pay some of this. Retailers will pay some of this. We’re just going to have to see it through.”

Trump has been piling on the pressure on Powell, even using a blowout in the costs of the Fed’s renovations of its Washington headquarters to try to pressure him to resign or provide an excuse to fire him “for cause”.

He wants lower interest rates to help generate greater economic growth and lower the cost of servicing the US government’s soaring debt levels – debt that will increase substantially as a result of his “One Big Beautiful Bill” that cut taxes and increased spending.

Powell said the government’s interest costs weren’t something the Fed took into account.

“We have a mandate and that’s maximum employment and price stability. We don’t consider the fiscal needs of the federal government. It’s just not something we take into consideration,” he said.

He also left open the possibility that, after his term as chair ends next year, he might serve out the rest of his term as a governor, which doesn’t end until 2028, despite the administration saying that he should, as other chairs have, leave the board when he relinquishes the chair.

Trump is going to appoint a successor to Powell who will do his bidding, or at least try to. The administration expects to appoint that person in the near term and hopes that they will, before they displace Powell, effectively become a “shadow” chair whose views influence on the Fed and markets overshadows Powell’s.

The worst-case scenario for Trump is that Powell doesn’t bow out gracefully, remains a governor and retains his influence over the majority of the Open Market Committee members.

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In effect, because he is seen as a protector of the Fed’s independence from politics and politically-driven decision-making – which is vital for its credibility and the stability of US financial markets – he would become the shadow chair.

That would really frustrate and infuriate Trump, but might help avoid a meltdown in US financial markets that could occur if the Fed were seen as being captured and directed by Trump.

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