Amid rising inflation and pressure from President Trump, the Federal Reserve must decide on a potential rate cut. Escalating disputes within the Fed could impact financial markets.
Trump's Pressure on the Fed
President Trump and his team are unhappy with Federal Reserve Chair Jerome Powell. Russell Vought, Trump's budget chief, claims Powell has 'grossly mismanaged the FED.' Vought points to expensive renovations at the FED's D.C. offices as wasteful. Trump is advocating for lower rates, but Powell is taking a cautious stance, maintaining that the economy can handle current rates while inflation remains above 2%.
Fed Members' Opinions on Rate Cuts
Fed Governor Christopher Waller is calling for a rate cut soon, arguing that current policy is 'too tight.' He believes inflation spikes, driven by Trump's tariffs, will be temporary. Other members like Michelle Bowman also support a cut at the July meeting, while St. Louis Fed President Alberto Musalem urges caution, seeking more inflation data. Minutes from the June meeting show a split in views, with some ready to cut and others alert to potential lasting inflation.
Fed's Balance Sheet Reduction and Its Implications
Waller addressed the Fed's large balance sheet, which peaked at $9 trillion during the COVID-19 pandemic. The Fed has begun reducing its bond holdings to lower excess liquidity. Waller believes the balance may drop to $5.8 trillion. However, managing long-term bonds poses a challenge, and he suggests shifting towards shorter-term Treasury bills. This process, while necessary, will take time and must balance reducing holdings and maintaining financial stability.
The Federal Reserve is under pressure from the Trump administration, which could influence economic policy in the coming weeks. Expectations for rate cuts are rising, and financial markets are poised for immediate reactions. Future decisions will hinge on inflation data and internal Fed dynamics.
