Despite President Trumps unprecedented pressure on the Federal Reserve to cut interest rates, the Fed’s Open Market Committee (FMOC) decided Wednesday to leave rates right where they are.
In its policy statement, the Fed removed the word “patient,” which market analysts interpreted as a signal that at least one rate cut -- perhaps two -- could come at future meetings this year.
“The FMOC said it believes its goal of promoting maximum employment and price stability is best served by maintaining the target range for the federal funds rate at 2-1/4 to 2-1/2 percent,” the Fed said in its policy statement. “The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased.”
The Fed appeared to suggest that its concern about the lack of inflation in the economy could be the main reason it would consider cutting the federal funds rate in the months ahead. A rate cut might have a stimulative effect and move inflation closer to the Fed’s target of 2 percent.
Consensus toward rate cuts
Economist Joel Naroff, of Naroff Economic Advisors, says one of the things that caught his attention was the large number of FOMC members -- seven -- who forecast two rate cuts before the end of the year.
“That is very aggressive and signals real concern about inflation and possibly growth,” Naroff told ConsumerAffairs. “The evaluation of the economy was relatively the same, with consumption a little better but investment a little worse. As for inflation, the slowdown in the market measures of inflation was the key difference. That has to be the only thing that the members are worried about in order to support the desire to cut.”
Naroff said it’s a little discouraging that the FOMC gave little reason to support the idea of aggressive rate-cutting. He notes that the FOMC members appear to think economic growth will continue well into 2020.
“The idea that two cuts could solve a perceived inflation issue is beyond me,” Naroff said. “Will the economy boom because of rates being down 50 basis points? I don’t know what model would have that happening.”
Important for consumers
The federal funds rate is a key factor in banks’ prime rate, which in turn sets the rates for auto loans and home equity loans. Credit card interest rates are also tied to the federal funds rate, so that when it rises or falls credit card rates usually follow.
Holden Lewis, NerdWallet’s home expert, says the decision to leave the rate unchanged means consumers with home equity lines of credit (HELOC) will see their payments remain the same for the time being.
“If the Fed moves to cut short-term rates at the end of July as expected, consumers with HELOCs will benefit from smaller monthly payments, which could give many consumers an opportunity to pay down other variable rate debt, like credit cards,” Lewis told ConsumerAffairs.
President Trump had publicly lobbied for a rate cut, something highly unusual for a president to do. Trump had raised the possibility that he might try to “demote” Fed Chair Jerome Powell.
When asked Tuesday whether he still planned to do that, Trump replied “Let’s wait and see what he does,” implying demotion could be on the table unless the Fed cut rates. At his news conference Wednesday, Powell said he intends to serve his four-year term as chairman.