US Fed finally cuts interest rates, but first sign of Trump influence emerges

“It’s challenging to know what to do,” Fed Chair Jerome Powell told reporters on Wednesday. “There are no risk-free paths now.”

Jobs and prices

Indeed, monetary policy decisions for the world’s most important central bank are littered with risks wherever one looks. Take the labour market, for instance. In its statement, the Fed’s Federal Open Market Committee (FOMC) – the 12 members of the Fed who vote on the interest rate decision – said “job gains have slowed” and that “downside risks to employment have risen”. This was quite the understatement considering what has happened over the last few months. Monthly non-farm employment additions have averaged less than 27,000 in the four months starting May.

The Trump administration’s problem with the monthly employment numbers is well known, with the American President firing the person responsible for putting them out, the commissioner of the Bureau of Labor Statistics (BLS), Erika McEntarfer, on August 1 after he called them “rigged”. Almost on cue, McEntarfer said on Tuesday that statisticians getting sacked for unfavourable data has “serious economic consequences” and risked putting the US in the same category as Argentina, Greece, and Turkey – “resulting loss of trust in economic statistics led these countries to worsening economic crises, higher inflation and higher borrowing costs. If we follow a similar path, all Americans will suffer the consequences.”

Powell on Wednesday described the Fed’s 25 bps reduction in interest rates as a “risk management rate cut.” While the labour market has visibly weakened, the impact of Trump’s tariff war on domestic prices is yet to play out fully.

“The Fed is now facing a two-sided risk, i.e., a risk to the full employment goal and the risk of excessive inflation,” Bernd Weidensteiner, Senior Economist at Commerzbank, said in a note.

Fed’s independence

Like the BLS, the Fed is another American institution in the midst of a battle for its independence. And Wednesday’s interest rate decision showed the reach of Trump’s influence, although it was unsuccessful on this occasion.

Of the 12 Fed members, 11 voted in favour of reducing the interest rate by 25 bps. The one member who did not agree with this decision was Stephen Miran. Miran, who was sworn in as one of the seven members of the Board of Governors of the Federal Reserve System just this week after Trump appointed him, wanted the interest rate to be reduced by 50 bps, not 25 bps. To be sure, economists were surprised Powell managed a “near-consensus vote” considering two other governors of the Federal Reserve System – Christopher Waller and Michelle Bowman – had favoured a rate cut in July, but went with the majority this week.

Trump has been aggressively calling for larger rate cuts for some time now and has chosen to use his ability to make appointments to the Fed to achieve this goal. While Miran is only filling what’s left of former Fed Governor Adriana Kugler’s term that is set to end in January, he could stay on if a successor is not in place. Miran, it should be noted, remains a White House staff member and is currently on unpaid leave. This is the first time in the Fed’s history that one of its Governors is also the President’s employee – hardly a ringing endorsement for the central bank’s independence. Powell’s term as Fed Chair ends in May next year.