By Emmanuel Bobby
The Federal Reserve is widely expected to leave interest rates unchanged on Wednesday as policymakers assess the state of inflation and the labor market.
Under normal circumstances, such a decision would generate little drama. This time, it comes amid extraordinary political and legal pressure on the central bank and its chairman, Jerome Powell.
The meeting follows the launch of a criminal investigation into the Federal Reserve and Powell by Jeanine Pirro, a close ally of President Donald Trump and the current U.S. attorney for the District of Columbia. Powell has accused the White House of using the investigation as leverage to pressure the Fed into cutting interest rates, a long-standing demand of Trump.
At the same time, the Fed’s independence is under scrutiny at the U.S. Supreme Court, where justices are considering whether Trump overstepped his authority when he moved to remove Fed Governor Lisa Cook last summer.
As Powell resists what he views as a coordinated pressure campaign, Trump is preparing to name his successor. Powell’s term as chair ends in May, and the president has said he has narrowed his shortlist to a handful of candidates.
While there may be little suspense around Wednesday’s rate decision, the broader stakes surrounding the meeting are unusually high.
Interest Rates
“The outcome is all but a foregone conclusion,” JPMorgan Chase chief U.S. economist Michael Feroli wrote in a note to clients. “Fed officials across the spectrum have indicated that after three 0.25% ‘risk management’ rate cuts, now is a good time to pause and take stock of developments.”
The labor market has shown signs of cooling in recent months, though economists disagree on how significant the slowdown has been. After shedding 173,000 jobs in October, the economy added just 56,000 jobs in November and 50,000 in December.
Despite the sluggish hiring pace, the unemployment rate edged down to 4.4% in December from 4.5% the month before. Recent jobless claims data suggest layoffs remain limited, Feroli noted.
Taken together, those indicators suggest the risk of further labor market deterioration “no longer looms as large as it did last fall,” he said.
Inflation, however, remains above the Fed’s 2% target, weakening the administration’s argument that rate cuts are needed to accelerate economic growth. After peaking at 3% in September, inflation eased to 2.7% in November and held steady in December. Some economists caution that those figures may be distorted by technical changes in data collection during last fall’s six-week federal government shutdown.
The combination of mixed signals has created what Powell often calls “fog” for policymakers. With no rate changes expected this week, investors will be closely watching Powell’s remarks for clues about possible cuts later in the year.
Power and Politics
Beyond Wall Street, attention is focused on the escalating political and legal clash between the White House and the Fed.
On Jan. 11, Powell disclosed that the Fed had received grand jury subpoenas and faced the threat of a criminal indictment. The rare public acknowledgment marked a sharp escalation in tensions and rattled global markets, raising questions about how far the president might go to undermine the central bank’s leadership.
The investigation stems from a long-running renovation of the Fed’s Washington headquarters. Trump and his allies have pointed to the project as evidence of mismanagement. Powell has defended the renovation, saying it was properly overseen and approved by the Fed’s board before he became chair. He has also asked the Fed’s inspector general to review the matter.
Meanwhile, the Supreme Court is weighing Cook’s challenge to Trump’s attempt to fire her over unproven allegations of mortgage fraud, which she and her legal team have denied. During oral arguments earlier this month, several justices from across the ideological spectrum appeared skeptical of the administration’s justification for her removal and sympathetic to Cook’s right to contest it.
In a notable show of support, Powell attended the Supreme Court hearing in person.
All of that ensures that, even if interest rates remain unchanged, Wednesday’s Fed meeting will be anything but routine.
Original article
Comments