No Change in the Fed Rate
Federal Reserve officials believe risk of inflation outpaced labor concerns, Minutes
Since Tr__p has been fumbling around with tariffs
July 2025: Majority of Federal Reserve officials believe the risk of higher inflation outpaces concerns about the state of the labor market. This is according to the latest minutes released by the central bank.
Inflation and the health of the U.S. job market came up in the discussions, with officials determining that price increases constituted a larger risk to the U.S. economy than job losses. “A majority of participants judged the upside risk to inflation as the greater of these two risks,” a record of the two-day meeting said.
In addition, Fed officials “generally” expected inflation to increase in the short term due to President Donald Trump’s tariffs, but it was still early to choose whether to change monetary policy.
“In terms of timing, many participants noted that it could take some time for the full effects of higher tariffs to be felt in consumer goods and services prices,” the minutes said.
The Fed ultimately left its benchmark interest rate unchanged for the fifth meeting in a row at the conclusion of the meeting of the Financial Open Markets Committee. It currently stands between 4.25 percent and 4.5 percent. Two Fed officials broke ranks and voted to lower borrowing cost, which hadn’t occurred since 1993.
One note from the report:
“In discussing risk-management considerations that could bear on the outlook for monetary policy, participants generally agreed that the upside risk to inflation and the downside risk to employment remained elevated. Participants noted that, if this year’s higher tariffs were to generate a larger-than expected or a more-persistent-than-anticipated increase in inflation, or if medium- or longer-term inflation expectations were to increase notably, then it would be appropriate to maintain a more restrictive stance of monetary policy than would otherwise be the case, especially if labor market conditions remained solid. By contrast, if labor market conditions were to weaken materially or if inflation were to come down further and inflation expectations remained well anchored, then it would be appropriate to establish a less restrictive stance of monetary policy than would otherwise be the case. Participants noted that the Committee might face difficult tradeoffs if elevated inflation proved to be more persistent while the outlook for the labor market weakened. Participants agreed that, if that situation were to occur, they would consider each variable’s distance from the Committee’s goal and the potentially different time horizons over which those respective gaps would be anticipated to close. Participants noted that, in this context, it was especially important to ensure that longer-term inflation expectations remained well anchored.“
“Minutes of the Federal Open Market Committee.” July 29 – 30, 2025
Why are increased prices coming from taxes considered as reasons to not lower interest rates? Tariff driven inflation seems a different economic condition than inflation from “expectations” or however else you want to talk about other inflationary episodes. Higher rates won’t make the tariffs lower. I don’t know enough to opine on where the rate ought to be, just not buying that if tariffs are driving inflation that increased Fed rate (or holding at a higher than possibly otherwise rate) is an effective approach. Rates did little to correct supply chain issues in the prior 4 years, so how is it a good tool to take on taxes? Is this a case of “we only have a hammer, so let’s just say that looks like a nail” kind of thinking?
@Eric,
Trump’s tariffs will cause increased prices for goods in the US. When prices go up, we call it “inflation.” The Fed’s expectation is that inflation will increase going forward. It is a rational expectation.
The Fed has two jobs: to control inflation and to maximize employment. The Fed’s tool for controlling inflation is to make the cost of borrowing more expensive. It does this by raising interest rates. Since increased prices coming from tariffs will drive higher inflation, that’s a very good reason for the Fed to not lower interest rates. Lower interest rates make borrowing cheaper. More borrowing puts more money into circulation to chase higher priced goods, fueling further inflation.
Of course higher rates won’t make tariffs lower. That’s silly. Higher interest rates work to lower demand. In return, this resists inflationary pressure caused by tariffs, meaning prices will maintain a more manageable level, avoiding or minimizing inflation.
Hope that helps.
Let me see if I can get this correct.
Bonds become more attractive and returns can increase when the Fed Rate decreases. Since inauguration, Trump has bought $100 million in Bonds. In all likelihood this is why he is pushing for a decreased Fed Rate. It may also depend on how he paid for those bonds. Does he have $100 million backing him up?
Bill, I mentioned this yesterday in the comments. Explanation:
Existing bonds have a set rate of return. If interest rates fall, the price of existing bonds go up because they are yielding a higher interest rate than bonds issued at the new lower interest rate. You can sell the higher yielding bonds on the secondary market for a profit. So the $100 million Trump invested in bonds could be worth well over $100 million if the Fed cuts interest rates. Bonds can have capital gains much like stocks can.
Mark:
I am sure you did and maybe and probably you planted that seed in my head. Thanks for affirming your comment and I got it right from what you said and I repeated.