President Donald Trump this week renewed his call for lower interest rates after a fresh inflation reading came in lower than economists had expected.
The Federal Reserve has defied Trump’s pressure campaign for months, however, opting to hold interest rates steady as policymakers observe potential tariff-induced inflation.
That posture will likely shift when central bankers meet next month, economists told ABC News, predicting a quarter-point interest rate cut.
A weak jobs report earlier this month revealed a sharp slowdown of the labor market, which could prompt the Fed to reduce borrowing costs as a means of warding off an economic slowdown, even if it opens up the possibility of higher inflation.
“The Fed has a difficult balancing act,” Derek Horstmeyer, a finance professor at George Mason University’s Costello College of Business. “They have to weigh an expectation of slower job growth against an expectation of inflation. I think they’re weighing all of it.”
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Futures markets are also expecting a rate cut. Investors peg the chances of a quarter-point interest rate cut at nearly 96%, according to the CME FedWatch Tool, a measure of market sentiment.
Five meetings and eight months have elapsed since the Fed last adjusted interest rates. The federal funds rate stands between 4.25% and 4.5%, preserving much of a sharp increase imposed in response to a pandemic-era bout of inflation.
The Fed is guided by a dual mandate to keep inflation under control and maximize employment.
In recent months, the central bank has voiced concern about a rekindling of inflation due to elevated tariffs. Importers typically pass along a share of the higher tax burden in the form of price hikes.
An inflation report earlier this week came in lower than economists expected, however, rebuking policymakers’ worst fears. Inflation held steady from the previous month and clocked in less than a percentage point higher than the Fed’s target rate of 2%.
In theory, lower-than-expected inflation allows the Fed to cut interest rates without significant concern about a spike in prices as result of the potential boost in demand.
“These inflation numbers give the Fed the numbers they need to start cutting,” Derek Horstmeyer, a finance professor at George Mason University’s Costello College of Business, told ABC News.
Meanwhile, the summertime cooldown of the labor market could set off alarm bells for central bankers wary of a possible rise in the unemployment rate, economists said.
Employers added an average of about 35,000 jobs over three months ending in July, which marks a major slowdown from roughly 128,000 jobs added monthly over the prior three months, the U.S. Bureau of Labor Statistics said earlier this month.
“These job statistics show there’s been a slowdown in the economy,” Gerald Epstein, a professor of economics at the University of Massachusetts, Amherst. “The Fed will probably choose to make a cut in response.”
Economists acknowledged that tariff-induced inflation effects could lag behind the onset of the policy, giving policymakers a misguided sense of comfort with price levels. Core inflation – a price measure that strips out erratic food and energy prices – ticked higher in July, indicating three consecutive months of rising inflation for many goods.
“We do have an increase in inflation in recent months,” Fedyk said. “It’s just coupled with a relatively worsening labor market.”
Since Trump took office, he has repeatedly urged the central bank to lower interest rates, saying the policy would boost economic performance and reduce interest payments on government debt.
“Jerome ‘Too Late’ Powell must NOW lower the rate,” Trump said in a social media post on Tuesday, referring to the Fed chair, just hours after the favorable inflation report. “The damage he has done by always being Too Late is incalculable.”
In recent weeks, Trump has also slammed Powell, citing cost overruns tied to the central bank’s $2.5 billion building renovation project.
The Fed attributes spending overruns to unforeseen cost increases, saying that its building renovation will ultimately “reduce costs over time by allowing the Board to consolidate most of its operations,” according to the central bank’s website.
The Fed is an independent agency established by Congress. Federal law allows the president to remove the Fed chair for “cause” — though no president has ever done so. Powell’s term as chair is set to expire in May 2026.
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Economists who spoke to ABC News disagreed about whether Trump’s pressure campaign could influence the Fed’s rate decision next month. Some analysts said central bankers may lean toward a rate cut in part due to Trump’s urgings, while others said the Fed would make its decision based solely on economic data.
“At the margin, it may tip them toward a cut,” Epstein said.
For his part, Powell has rejected the notion of political interference in the Fed’s policy decisions.
Political independence, Powell said last month, gives central bankers the “ability to make these very challenging decisions in ways that are focused on the data, the evolving outlook, the balance of risks – and not on political factors.”
